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.

It’s been an interesting week for the FHA loan rates.

We’ve had every piece of bad news that mortgages could hear:

1. The economy is rebounding.  We’re seeing expansion in nearly every key metric.
2. Housing is on a roll.  This also has negative signals for the FHA interest rates.
3. Inflation is starting to creep up.  Inflation equals higher rates.

Still, after all of this bad news and after losing 11 of the last 15 trading sessions, the FHA mortgage rate is still at 5%.  That’s surprisingly great news.

We’re still looking at an odd scenario where the rate is 5% for FHA vs Conventional rates at 5% as well.  That conventional rate requires a 740 FICO for the best rate.  For a buyer with a 700 FICO score, it is actually cheaper to get the FHA loan.  That’s significantly different than just a few years ago.

It’s been an incredible month for the Government loan programs.

Today, we’re looking at the 4.75% 30 Year Fixed Rate.

On October 16th, the discount points required to buy the loan down to 4.75% was 1.82%.

As of today, it’s…..0.000%.

This is a staggering 182 basis point run in just 45 days.  On an average loan of $250,000, this is a whopping $4,550 in reduced closing costs to end up with the same low FHA loan rate of 4.75%.

We’re currently at the best rates of all time.  Even one year ago when conforming rates dropped, the FHA vs Conventional comparisons were not this even.  We’re now only seeing a spread of .125% between the two rates and the comparisons increasingly favor FHA when either of two conditions is true:

• Credit score is below 720
• Down Payment is less than 10%

Under either scenario, you’re looking at sub-5% rates but long-term savings typically lean towards the FHA programs.