Securing an FHA mortgage is about to get more expensive.

The FHA announced Wednesday that it is making a few policy changes to reduce their overall risk.

It will mean tougher approvals and higher costs to secure a mortgage approval for those who wait.

As listed in the official announcement, there are 3 major guideline updates for the FHA:

1. Upfront mortgage insurance premiums are increasing to 2.25% from 1.75%
2. Minimum 10% down payments for those with less than a 580 FICO
3. Seller concessions are being limited to 3%, down from today’s allowable 6%

The FHA has also appealed to Congress to raise an FHA borrowers’ monthly mortgage insurance premiums.   The reason the FHA vs Conventional comparisons keep favoring FHA is that the premiums are so low.

It’s clear that the Federal Housing Administration needs to clean up their portfolio and yet balance their mission of creating affordable mortgage loans.

They are also going to start improving the quality of their lenders.  They are introducing a “termination clause” to attack the problem where it starts.  Should certain lenders represent a disproportionate number of the bad loans, they will lose their right to originate FHA loans.

As a result, home buyers can expect tougher FHA underwriting in 2010.  This won’t be as much due to the guideline changes, but more due to the “termination clause.”  For lenders to prevent being the “bad lender,” they will add overlays to insure that they do not have a disproportionately bad portfolio.  Examples of this already exist:  The FHA will allow 580 FICO scores, but nearly all lenders require at least 620 FICO.

The new guidelines don’t go into effect until spring, but acting now will save the up-front mortgage insurance premium monies plus lock in today’s monthly mortgage insurance payments before those too get more expensive.

Last week saw rates take a bruising after chasing all-time lows right near Thanksgiving.  The FHA interest rate was pushed higher, but still opens this week under 5%.

It is hard to keep in context how low mortgage rates are.  We went up .25% and are still below 5%.  That’s great news today.  It’s scary news into the future.

The economic data continues to point towards a slowly rising economy with sporadic pockets of bad news.   Every time that the Federal Reserve says “inflation,” rates go up .125%.

Today’s mortgage rates still sit more than 1% away from their ‘normal’ levels.  If you are looking at refinancing an FHA loan, this is a great time for it.  If you are looking at buying a home, today’s FHA interest rates make it much more affordable than it would be in a year.

Today, we’re looking at the value of term reduction on a mortgage loan.  Term (length of the loan) reductions can be a great vehicle to accomplish two goals:

1. Pay off the loan more quickly
2. Reduce the total cost of interest over the life of the loan

In general, the mortgage interest rate goes lower as the term of the loan is made shorter.   The 15 Year will nearly always carry a lower rate than the 30 Year.

The 20 Year is odd.  Sometimes it is virtually identical to the 30 Year, sometimes it will be as much as .25% lower.  These numbers look at the total cost of the mortgage (cumulative interest paid) over two-year intervals from closing until the 10th year.  Years 21-30 are very heavily weighted in favor of the 20 Year Fixed since that homeowner no longer is making payments.

Based on yesterday’s rates, the comparison would look like this:

Closing costs are no higher, no lower for the 20 Year Fixed.  As such, at the time of closing, the loans are identical.   It is over time that the value of the 20 Year begins to appear.

Here is a look at the total savings over the first 10 years:

As you can imagine, the real savings are just kicking in when we finish our graph to the right.

Is the 20 Year right for everyone?  Probably not.  However, with rates so low, many former 30 Year Fixed borrowers are able to stomach the 20 Year Fixed payment with just a slight increase to payment.

Last week brought a third-consecutive week of FHA loan rate improvement.  On the heels of a dismal University of Michigan Consumer Sentiment report on Friday, rates followed through and finished off the week strong.

We go into this week with a few key readings, namely, the CPI and PPI.

Current Status: Inflation Low. Rates Low.

If that current status shows inflation is heating up, rates will jump.

This week also welcomes the new FHA Streamline Refinance changes and that brings on a new world to the FHA mortgage refinance.  The new FHA loan requirements on the refinance are essentially “normal” on the “streamline” refinance.

The FHA interest rate continues to trend lower.   Mortgage rates plunged through the 5% mark and are sitting at their best levels, in the FHA products, in quite some time.

The much-loved FHA Streamline Refinance program has big changes coming next week.  Beginning November 17, FHA Streamline Refinance applicants will need to evidence:

• Income
• Verification of Employment prior to close
• Assets to cover the cash-to-close.

Further, the FHA is limited loan-to-values to 97.75% for homeowners that want to “roll closing costs” into their mortgage.

The current rules for this type of an FHA mortgage refinance are nothing more than:

• FICO scores must be 620 or higher
• The refinance must provide a “tangible benefit”
• No mortgage lates allowed in the last 12 months

Big changes for those that don’t qualify.  For those that do, they’re still looking at incredible rates.