As we have reported in recent articles, FHA defaults had increased to a level that put the FHA loan programs in jeopardy so FHA guidelines could be tightened. The Department of Housing and Urban Development announced new measures will help FHA reduce foreclosures, control risk, continue supporting housing recovery The Federal Housing Administration Commissioner David Stevens today unveiled three specific policy changes to strengthen the FHA’s capital reserves while enabling the agency to continue to fulfill its mission to provide access to homeownership for underserved communities.
In addition to earlier steps taken to manage its risks and to boost reserves, FHA is proposing to update the combination of credit and down payment requirements for new borrowers; reduce seller concessions from six to three percent; and tighten underwriting standards for manually underwritten FHA mortgage loans. “These are the latest in a series of changes to allow the FHA to manage its risk better while continuing to support the nation’s housing recovery,” said Stevens.”
FHA guidelines could be tightened more for purchase and FHA refinance programs.
1. Update the combination of credit and down payment requirements for new borrowers. New borrowers seeking FHA home financing will be required to have a minimum FICO score of 580 to qualify for FHA’s flagship 3.5 percent down payment program. New borrowers with credit scores of less than a 580 will be required to make a cash investment of at least 10%. Borrowers with credit scores of less than 500 will no longer qualify for an FHA-insured mortgage.
2. Reduce allowable seller concessions from six to three percent. Allowing sellers to contribute up to six percent of the home’s sales price to offset a buyer’s costs exposes the FHA to excess risk by potentially driving up the cost of the home beyond its appraised value. Reducing seller concessions to 3% will bring FHA into conformity with industry standards.
3. Tighten underwriting standards for manually underwritten FHA home loans. When using compensating factors in the underwriting process, FHA lenders will be required to consider those factors which are the best predictive indicators of loan performance, such as the borrower’s credit history, loan-to-value (LTV) percentage, debt-to income ratio, and cash reserves.
