HUD has been hit as hard as anyone in the distressed housing market over the past few years, and we can see the effects in multiple changes to FHA loan requirements and guidelines in recent years. HUD (U.S. Department of Housing and Urban Development) insures all FHA loans and guarantees the lender originating the loan against losses in case of a default by a borrower. HUD has one of the more borrower friendly processes to assist a struggling homeowner who finds themselves in a hardship situation and unable to continue paying on their upside down home loan.
HUD’s short sale program is called a Pre-Foreclosure Sale and contains several beneficial features:
- Pre-approval of the borrower to participate and a pre-approved listing price.
- Once approved the borrower and Short Sale Realtor have 120 days to obtain a contract to buy
- Guaranteed forgiveness of the debt with no deficiency judgment for the unpaid balance
- Junior lien holders can receive up to $1,500 at closing
- Possible $1,000 Borrower Incentive paid to seller at closing
HUD has taken major losses due to the large number of defaulted loans in recent years. The most recent series of changes were announced by the Federal Housing Administration (FHA) on January 30, 2013. These changes are designed to further strengthen the Mutual Mortgage Insurance (MMI) Fund and encourage the return of private capital to the housing market. The MMI fund is the insurance pool that each FHA borrower pays premium into, and insures the lender against default on the loan. Some changes will affect borrowers on certain FHA loans with case numbers initiated on or after April 1, 2013 and others for case numbers issued on or after June 1, 2013.
Following are a few of the changes:
- Standard Fixed Rate and Saver Fixed Rate HECM pricing options are consolidated. This change is effective for FHA case numbers on or after April 1, 2013. For more detailed info see HUD Mortgage Letter 2013-01.
- The annual Mortgage Insurance Premium (MIP)for most new FHA loans will increase by 0.10 percent. Premiums on jumbo loans will increase by 0.05 percent, excluding certain streamline refinances.
- Most FHA borrowers will now have to continue to pay annual MIP premiums for the life of the loan. Previously it was possible to quit paying MIP once the principal balance was reduced to 78% of the original loan balance. For more detailed info see HUD Mortgage Letter 2013-04.
- Manual underwriting will be required for borrowers with credit scores below 620 and DTI ratios above 43%. See DTI Mortgage Letter
- Down payments for jumbo loans will go up from 3.5% to 5%.
- More stringent enforcement of guidelines for loans to borrowers, only 3 years after a foreclosure.