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The Federal Housing Authority has been assisting Americans in buying homes for the better part of a century. The Authority hosts several programs that help both first-time and repeat homebuyers to obtain financing on the properties in which they are interested through a series of state and federal initiatives. For example, the FHA offers a first-time homebuyers program that allows buyers to get into a house with as little as three-and-a-half percent down, and includes closing costs and other side expenses in the cost. It also offers assistance to buyers looking to purchase “fixer upper” residences and Americans over the age of sixty-two who need housing assistance.

The FHA recently changed the rules for loans, however. These changes are really going to throw a wrench in the process that buyers have come to expect when dealing with these types of mortgages. Here’s a summary of all the recent changes to FHA loans, so that you can be informed as to the most current information that you need to know.

Seller concessions are one area that have seen significant changes under the header of FHA mortgage assistance. These concessions are dealers made by home sellers to buyers as incentives that help offset the buyers’ costs. The price of closing costs, home inspections required by insurers, and appraisals can all fall under the heading of possible concessions that sellers might make on behalf of buyers. There is and has long been a cap on the allowable seller concessions that may permissibly be given. It used to be six percent, but FHA loan changes have halved that amount to just three percent. Why is this, you might be wondering? Well, the Authority has determined that there is a statistically-significant correlation between high seller concessions and subsequent default rates. This could possibly be because sellers are making concessions simply to mask the fact that they are driving up the price of the home. Concessions therefore equal higher home prices. Allowing only lower percentage concessions will hopefully take at least a small chunk out of the default rate. As a buyer, you can expect the perks you receive from sellers to be less lavish. It’s important to note that concessions in excess of the three percent cap are not expressly prohibited. Rather, any concessions in excess of three percent will necessarily have to result in a reduction of the home’s selling price on a dollar-for-dollar basis, which also scales back on the allowable amount of the mortgage.

The next significant area in which FHA loans have changed is credit scores. Your FICO score, the ubiquitous three-digit number that identifies to banks and other creditors how good of a credit risk you are, is used by the FHA as a means of determining eligibility for several loan programs. For the first time, the FHA would impose a minimum credit score of 500 on potential homebuyers, with extra penalties for those with the worst credit. Mortgage holders with scores below 580 would be obliged to cough up minimum down payments of at least ten percent, as opposed to the three and a half percent that is the standard for all other buyers. This stands to reason, since the lower the FICO score, the higher chance that a borrower will eventually default on their home loan (or anything else, actually). As measured this past January, FHA borrowers with credit scores less than 580 were three times as likely to default on their mortgages than those with credit scores of 580 or greater. This change is actually not likely to have a dramatic effect on FHA borrowers, since the lenders with whom the agency subcontracts already have much more strident credit restrictions. Only around one percent of FHA borrowers have a credit score below 580.

Underwriting of FHA loans is also about to change. For those not in the know, this term refers to the process through which loans are actually approved or denied by an automated system that takes into account many factors about a prospective real estate deal: the property’s value, the borrower’s income, debt, and credit score, and the likelihood of the borrower(s) repaying the loan. It used to be the case that higher-risk mortgage applicants who were rejected by the FHA’s automated underwriting system could be manually approved for a loan by underwriting staff with fairly little trouble. Nowadays, borrowers flagged by the system for review will undergo much more exhaustive scrutiny of their case before manual approval. No longer will lenders have such free discretion with approving loans. The overarching theme in the FHA’s changes, in case you didn’t notice, is risk prevention. The agency wants to cut down on the number of loans that could potentially bounce back as defaults. Borrowers who are kicked out by the underwriting system may be required to pony up cash reserves to be approved for a loan. Cash reserves may equal one mortgage payment or greater. Those buyers with subprime credit scores (below 620) would be more closely examined for fitness of receiving a loan at all. These buyers might be restricted to how much of a mortgage they can receive based on their debt-to-income ratio as a way of ensuring that they do not bite off more than they can chew and become a high risk for financial disaster down the road.

All of these changes so far have been on the negative side, since they represent a tightening of current rules. The single rule change that will likely be met with great adulation by consumers is the new short refinancing program being offered to buyers who are underwater on their current loans. These borrowers owe more on their mortgages than their current home is worth, which is obviously a poor situation. The new FHA rules would allow upside down borrowers to refinance their existing mortgages into an FHA loan that would be for a lower amount. The issue of negative equity is a huge one in the American real estate market today, since these people are much more vulnerable to foreclosure. If upside down borrowers experience a major financial crisis like a lost job, they have no equity in their home from which to draw, and no way to quickly dispose of the house through a speedy sale if needed. This program is designed to aid in these cases, albeit with some serious consequences to consider. Not all homeowners will qualify, since the lender of their mortgage must agree to reduce the outstanding loan balance by at least ten percent. Borrowers must have around thirty-one percent of their gross monthly income free and available to make monthly mortgage payments (which will likely go up in exchange for the bank knocking money off the mortgage), and borrowers’ credit scores will likely be affected in a negative way. On the other hand, it’s good to know that the FHA is concerned with more than just risk management for itself and its partners, and that it is doing its part as a federal agency to assuage the foreclosure crisis in the United States today.