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FHA requirement changes to mortgage insurance, higher credit score needed

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FHA loans are popular because you can put less money down, but under the new rule, you may wind up paying more money.

FHA, Federal Housing Administration is a government supported mortgage loan product.

Randrea Majors-Graham of The Homeownership Resource Center said, "FHA gave individuals with lower credit scores a gateway to the ability of having the American dream. So that's one of the reasons FHA is more widely used because more people could actually get access to a home than with conventional lenders."

Last month, the credit score required to get an FHA loan changed. Before, buyers with a minimum score of 580 could qualify with some banks, but now the rating is in the 620/640 range. Buyers with a lower score may still get approved, but it'll take more work.

"Your manual underwrite from and underwriter may say that because of the high risk that your score poses you may need to have more of an asset, more cash in the bank in order to close on the loan," said Graham.

Another big change will be coming June 3rd. If you already have an FHA case number, the new changes won't apply to you. If not, you may face higher mortgage payments because of the mortgage insurance premium. Also referred to as MIP, it is insurance for the lending bank.

Graham said, "If that borrower was to fall behind on that mortgage and they should not make those payments or that house should go into foreclosure, that's what that mortgage insurance is for."

Right now, most homeowners pay MIP for about 5 years, and then they're able to drop it lowering their monthly payments. As of June 3rd, MIP will stay on the loan for the full 30 years.

"The mortgage insurance premium is based off of the loan amount. Mortgage insurance premium could be a pretty nifty chunk of change. It can be a really big deal to a first time home buyer or to any homeowner," said Graham.

Graham says due to the amount of loses FHA took during the foreclosure crisis, they want to be sure to have enough funds to help homeowners behind on payments.

Those of you looking to refinance an FHA loan should also get an FHA case number before June 3rd when the new changes kick in.

Graham says the FHA loan is also appealing to those with student loan debt. She says it is one of the only mortgage loan products that doesn't count student loans against the buyer's credit history. Everyone from doctors to teachers could benefit.

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