It is official! The FHA is in trouble (move over Washington Mutual!), but instead of going out of business, they are tightening requirements for both lenders and borrowers alike.

In order to make sure the lending institutions they buy loans from are solid, they have raised the bar and increased the “transparency” of same.  For one thing, there will now be a performance ranking system to rate the lenders, visible by the public. The FHA is also raising the lender net worth requirement to 2.5 million and increasing the buy-back liability for bad loans. These steps are being taken to make it harder for lenders to write FHA loans (they are big money makers) and easier to lose the right to do so (big money loser).

On the other side of the coin, the FHA is raising the bar for the borrowers themselves, requiring them to invest more “skin” in the transaction and hopefully making it less palatable to walk away. Here are three changes coming into play in the Spring (now):

1. The Mortgage Insurance Premium (MIP) is being increased from 1.75% to 2.25%. This can increase the upfront closing costs by approximately $500 per $100,000.

2. The down payment will increase to 10% for borrowers with a FICO score under 580. Borrowers above that may still be able to get away with 3.5% down. However, the individual lenders may set their own FICO score/loan to value standards within their own guidelines.

3. The amount a seller may contribute to the borrowers’ closing costs are being adjusted down to 3% from the current 6%. This is allowed when the seller agrees to pay closing costs by increasing the sale price of the home to include the money paid. The sale price is increased and the mortgage amount is increased accordingly. In a market where prices are still dropping, inflating contract prices is not a good idea.

What type of affect will these changes have for the Spring real estate market? depending on the geographic area and the percentage of FHA loans obtained, it can reverse the markets negatively.  In the national market, these percentages will slow down the rebound at least enough to feel it. How will it hit the mortgage industry? Hard.