FHA (Federal Housing Authority) is the government agency that provides federally insured mortgages. The majority of people buying homes these days use an FHA mortgage because it is the only option they have. FHA mortgages only require a 3.5% down payment, are more flexible with credit history and score, and have less expensive mortgage insurance than conventional loans. Most homebuyers don’t have a large down payment and usually have less than perfect credit. Conventional loans in Washington state currently require a 10% down payment and the mortgage insurance, although no upfront insurance required, is more costly per month.

Things are changing, though. FHA is committing to tightening their guidelines, and will be announcing the new changes as soon as January. Here are some of the changes that are being discussed:

1. Increasing the down payment requirement from 3.5% to 5%
2. Reducing the amount that sellers can contribute towards their closing costs from 6% to 3%
3. Increasing the amount of mortgage insurance required – both the upfront insurance and the monthly premium amount
4. Increasing the minimum credit score
5. Increasing the interest rate for borrowers with lower credit scores

In addition to the changes being planned for FHA loans, Fannie Mae is also tightening their guidelines, as well. As of December 12, 2009, the following underwriting guidelines will be in place for all mortgages, including both conventional and FHA.

1. Minimum credit score of 620
2. Maximum debt-to-income ratio (total monthly debt divided by total monthly gross income) of 45% (up to 50% for very strong borrowers) -note- Currently there is no set debt-to-income limit. I have seen ratios of up to 67% get an approval.

Underwriting guidelines continuing to tighten. If you are considering buying a home, but are waiting for home prices or rates to come down even more, you may find that you’ve waited so long that you no longer qualify. Rates are the lowest that they have been in 50 years. Home prices may never be this low again. It’s time to put every penny you can into savings, get your credit score up as high as possible, and make your move now. (Whatever you do, DON’T try and improve your credit score on your own! Please give me a call and I’ll be happy to go over your credit report with you.)