If you are thinking of buying a home and you are applying for a FHA loan read about the following changes that could impact you.

On January 20, 2010, FHA announced they were making some changes in order to ensure long-term financial soundness.  Back in October of 2009 FHA did announce that its capital reserve fell below the congressionally mandated level of 2 percent.  Due to the drop a call for action took place in order to help strengthen FHA.

Here are the announced changes FHA is making:

1. Upfront mortgage insurance premium will increase to 2.25 percent.  That is up front 1.75 percent. You will be allowed to finance your upfront mortgage insurance premium.  The change will take place on April 5, 2010.

Here's a quick explanation of upfront mortgage insurance premium.  Monthly mortgage insurance is required for loans with less than 80% loan-to-value ratio (meaning you are putting less than 20% down on the house).  The FHA mortgage insurance protects lenders against losses that result from homeowners defaulting on their mortgages.  The up-front MIP can be paid in cash or financed by the borrower.  The majority of the time, the MIP is financed by the borrower meaning that 2.25% of the loan amount is added to bring about a total loan amount. 

2. The minimum down payment will remain at 3.5 percent, but borrowers with credit scores below 580 will be required to have a down payment of 10 percent.  Expect this change Spring/Summer 2010.

3. Seller concessions will be reduced to 3 percent from 6 percent.  What does this mean? When you make an offer on a home and you ask the seller to pay your closing costs they will not be able to give as much as they have in the past.  In the past the seller would be able to pay up to 6 percent, but with this change the seller will only be able to pay 3 percent.  This is expected to take effect Spring of 2010.  

As soon as I know exact effective dates I will post it.  At this point I only have approximate time frames for some of the changes.

** Keep in mind if you are looking to buy a home in the next few months the upfront mortgage insurance premium increase goes into effect 25 days before you need to be under contract in order to qualify for the home buyer tax credit.