What was at one time a green light for bad credit mortgages may be at risk as HUD considers incorporating minimum fico requirements for FHA home loan programs for both purchase and refinance products.  HUD contends that their oversight committee will implement a minimum credit score requirement of at least 500 for FHA loan approvals.   Borrowers who are plagued with bad credit would likely be hindered by HUD’s policy mandate of applicants to have credit scores higher than 500 for FHA-home loan requirements.  Believe it or not, FHA has never had credit score requirements factored into the FHA underwriting guidelines.  According to Michael Fratantoni, of the Mortgage Bankers Association “It really is just reforming what FHA lenders and FHA loan guidelines have been doing for quite a while.”  FHA lenders had instituted their own minimum credit score requirement and many loan professionals did not know that Fico score restrictions did not come from The Federal Housing Administration. 

FHA has implemented several changes in regards to FHA requirements for mortgage companies to be approved to offer FHA loan programs.  This government finance giant has tightened FHA loan guidelines and made significant initiatives in an effort to reduce the risk of FHA loan defaults and home foreclosures across the nation.

According to HUD Commissioner David Stevens, they have made a concerted effort to enhance the public perception for responsible lending while also boosting FHA loan reserves that act as insurance for non-performing mortgage loans.  It is clear that the HUD Commissioner believes that the entity can carry out their plan to protect the FHA loan reserves that the likelihood of FHA to continue to offer affordable home financing programs is good.  FHA has been helping first time home buyers become homeowners with affordable low rate FHA loans since 1934.  It is no secret that HUD has been concerned that the FHA loan programs was in jeopardy of becoming extinct because of poor loan performance and loan companies pushing their subprime mortgage candidates to the FHA loan products.  A few years ago, FHA loan delinquencies started to increase, but so have defaults for nearly all types of home loan products.  Conventional, jumbo, home equity and even VA loan defaults have all risen over the last few years.  FHA loan policies continued to play an important role in helping our economy rebound as they remain the biggest advocate for affordable home financing and fair lending.

FHA has made several moves recently in an effort to raise the standards and FHA loan requirements for FHA lenders offering single-family home loans.  Most insiders believed that the Federal Housing Administration had targeted single family homes because of the FHA loan defaults.  However, for the first time in nearly forty years, FHA announced they would be tightening FHA guidelines for multifamily home loans. Menzo Case, the president and chief executive of Seneca Falls Savings Bank in upstate New York said, “We’re not surprised by anything nowadays.” Among the new FHA requirements, the government agency is poised to elevate the debt service coverage ratios while reducing the loan-to-value and loan-to-cost ratios.

Will FHA Loosen Loan Requirements for Borrowers?

According to George Kaganovich, a mortgage banker from iServe Lending in California, “Each time FHA tightens the guidelines it seems to pinch consumers as fewer borrowers have the opportunity to refinance into a better loan.” Kaganovich continued, “Many homeowners have come to depend on FHA for fixed rate refinancing so hopefully things will get easier for them soon.

FHA is also requiring additional verification of a property’s financial performance, an expanded review of the borrower’s credit and the pre-screening of certain mortgage applications to prevent certain loans that may not make ever close, but would create a bottle-neck in the processing departments.  Many FHA loan companies see these guideline changes as major obstacles for struggling borrowers, but they understand why FHA has raised the standards.

Have you heard of the “Green Mortgage Loans” that FHA is offering borrowers?  FHA offers an energy efficient home loan that enables borrowers to finance home improvements in an effort to promote environmentally friendly appliances and energy systems in the home.  These loans also can be used in conjunction with the FHA 203k rehabilitation loan insured by FHA. These energy efficient mortgages encourage home buyers or homeowners seeking a refinance to modernize their house by financing the improvements into their home loan.  

The energy efficient home mortgage loan is available to borrowers who don’t necessarily need to refinance, but just need help financing some repairs in the home.  HUD insures the FHA loan for loss on any improvements the homeowner makes. This unique FHA mortgage can be as small as $7,500, or as large as $25,000. While this home improvement financing option is helpful to many Americans, it is not for everyone.  These FHA loan programs pose a higher risk to the FHA lender, so in most cases they will require a higher credit score than other FHA home loan products.

People have been asking me recently if FHA offers any home equity loan programs for home repairs and improvements.  Even in a recession, making home improvements is still important to most homeowners and the FHA 203K loan provides the opportunity for homeowners to finance home improvements.  We are seeing a home remodeling trend because homeowners would rather not spend their money upgrading to a more expansive home.  In years past borrowers had used second mortgage loans to finance home improvements, but qualifying for an equity loan is difficult. In most cases to qualify for a second mortgage a borrower would need a combine loan to value under 80%.  That means that even after the new home improvement loan the borrower would have 20% home equity left in their property.  In today’s housing market equity is hard to find. 

A popular alternative to a home equity line of credit is the FHA 203K.  A few years ago HUD rolled out a new type of FHA refinance.  The 203K enables FHA borrowers to get access to funds for home rehabilitation to pay for the proposed home improvements.

Like FHA loan programs, the FHA 203k loan has its limitations and is subject to FHA loan limits is the lowest of these three calculations:

          Borrowers existing mortgage on the property plus rehabilitation and certain closing costs.

          Present property value plus rehabilitation costs.

          110% of the improved value multiplied by FHA’s 96.5% maximum loan-to-value ratio.

FHA mortgage rates are subject to change and the borrower is subject to FHA loan requirements.

A frequent question from loan officers and mortgage brokers is in regards to the longevity of the FHA mortgage product.  I received an email just yesterday from a FHA lender asking me the following, “Do you believe that HUD will pull the FHA loan programs for borrowers looking to refinance their home?”  Since the subprime crash of 2006, there are still thousands of FHA mortgage brokers who rely heavily on FHA home refinancing.  I wanted to address this in this article, because I believe that FHA lending is in jeopardy.  FHA loan defaults have been climbing like the rest of the mortgage industry.  FHA is a government home loan program and our government is in serious debt.  The US government owns nearly 97% of all mortgage securities, so if the homes continue to be foreclosed upon because borrowers are not making their monthly loan payments, then it is safe to say that yes the future of FHA financing is cloudy at best. 

Let’s take a look at the FHA loan programs at risk.

FHA 203B – This FHA loan program enables borrowers to get cash out up to 85%.  FHA reduced it 10% from 95% cash out refinancing last year.  It will be interesting to see if the 10% reduction helped reduce FHA loan defaults for borrowers who took cash out when they refinanced their home. 

FHA Streamline – This legendary refinance loan is only for existing FHA borrowers seeking a rate and term refinance.  HUD tightened the FHA guidelines by not allowing borrowers to finance the lender closing costs.  FHA streamlines do not allow cash out and this new rule has significantly reduced the number of FHA streamline refinances in 2010.  My guess is that the streamline program will survive if FHA survives. 

FHA Home Loans – FHA goes hand in hand with first time home buying loans so it’s hard to imagine FHA would eliminate their flagship mortgage product, but if FHA loan defaults continue anything is possible.  In 2009 FHA loan reserves dipped to dangerously low levels, so funding the FHA program must continue to pass through Congress.  Last year FHA increased the down-payment requirements from 3% to 3.5%.  I would anticipate that this will go to 5% sooner rather than later.

To HUD’s credit, FHA loan requirements for FHA lenders have increased dramatically.  These changes were made to further solidify lending and weed out the shady or uncommitted lenders.  As mentioned earlier HUD also mandated significant changes to FHA guidelines.  Down-payment, home equity and cash out requirements were all tightened in 2009 and 2010.   It is my contention that the FHA loan product will survive, but I believe we the tightening of guidelines is far from over.

FHA announced new changes to FHA loan guidelines in an effort to improve its depleted cash reserves.  A few days ago, HUD announced tighter FHA guidelines with multiple changes to FHA underwriting.  A recent article revealed that FHA requirements may actually penalize borrowers with poor credit.  The FHA Mortgage Lending Blog believes that the Federal Housing Administration will expand mortgage refinance guidelines later this year.

FHA will enable borrowers to continue financing the upfront MIP. The agency also will pursue legislative authority to allow flexibility to bring the annual premium, which borrowers pay on a monthly basis, higher. Also, seller concessions will be reduced to 3% from 6%. Frank Black, who managed a Wells Fargo branch in California said, “After reviewing the changes to the FHA requirements, I believe FHA lenders will agree that the new rules make sense and are needed to keep the government financing alive. A few years ago, many brokers and lenders took advantage of FHA underwriting by pushing the envelope with risky home loans.”

Visit the FHA Mortgage Lending Blog and read the original article > FHA Mortgage Guidelines 10% Down for Low FICOs.

The FHA home loan guidelines should see significant changes in 2010.  Look for credit score and down-payment requirements to rise.  FHA rates for January 4th, 2009 are down as the conforming thirty-year fixed mortgage rate is right at 5%.  The conforming fifteen year fixed mortgage rate is at 4.45% and the conforming 5/1 ARM is up slightly to 4.14%.  The 10 year treasury rate yield has pulled back slightly today which is a strong indicator that mortgage rates are going to be stable to down.  It will be interesting to see how FHA mortgage rates and the 10 year treasury rate yield move over this first week of January.