Recent FHA Changes

Converting Existing Homes to Rentals

The FHA changed their underwriting rules to limit the ability of a homeowner to use rental income from a previous residence that it converted to a rental property, when applying for a new mortgage on a second property. Under the new rule, the homeowner must prove sufficient income to make both mortgage payments without the rental income or has an equity position in the rental property that it will not likely result in defaulting on that mortgage. This change mirrors the announcement by Fannie in August.

Apparently, homeowners, in increasing numbers, are choosing to vacate their existing principal residence and purchase a new residence. They are then providing misleading information on the rental income of the property being vacated to justify the new mortgage.

Moratorium in Risk Based Premiums

The Housing and Economic Recovery Act provided for a one-year moratorium on the implementation of the FHA’s risk based premiums beginning October 1, 2008. The effect of the risk based premium was to increase the premium based on the amount of the down payment.

This will not delay the implementation of an upfront premium as well as monthly premiums on all loans.

Seller concessions of 6% are still allowed; however, down payment assistance programs have been eliminated effective October 1, 2008.

Down Payment Requirements

The Housing and Economic Recovery Act also called for an increase in down payment required to 3.5%. That change will NOT go into effect until January 1, 2009.