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.

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.

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.

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.

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 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.

FHA announced new FHA guidelines coming 2010:

– HUD will increase “up front” cash required on a FHA home loans.

– HUD will increase compliance and hold FHA lenders accountable for losses associated with loans that do not meet FHA standards. As of December 8th the FHA this year has suspended eight lenders and withdrawn approvals for 270 others.

– HUD cut allowable seller concessions to 3% from 6% in a move to limit incentives to inflate appraised values. The move reduces the money the seller can contribute to a buyer’s closing costs, discount points and other concessions without impacting the buyer’s mortgage.

– HUD is raising the minimum credit score for new loan applicants. The FHA has yet to determine the minimum “FICO” and may factor in the down payment.

– The FHA will develop a “lender scorecard” on HUD’s website that summarizes performance of FHA lenders that make FHA loan offers.

– FHA proposes to increase the required lender net worth to ensure accountability. HUD is proposing an initial increase in the net worth requirement, from $250,000 to $1 million in the first year, and at least $2.5 million after three years.

– A proposed rule would hold approved FHA Lenders responsible for loans originated by mortgage brokers. Brokers will no longer receive independent FHA approval for origination eligibility.

– The FHA is requiring that FHA lenders submit annual financial statements.

– It is bringing streamline refinance loans into line with other FHA origination guidelines. Changes include requirements for payment history, income verification and capping the 125 % loans for LTV.

– The FHA will reduce the period for which an appraisal is valid to four months from six to 12 months.

According to MarketWatch, “Once the home financing market started to collapse,” says, “the government decided the FHA should try to prop up the market.” The FHA loosened their credit guidelines some but not as far as the subprime lenders had in previous years. FHA guaranteed loans with a down payment as small as 3.5% and grant homeowners more access to take out cash refinance loan. In the last five years, Congress doubled the maximum FHA loan to $729,750.” FHA mortgage rates continue to reports fixed 30-year rates around 5.25%.

FHA increased its down-payment requirement to 3.5 % from 3 % last year? FHA also campaigned hard for Congress to drop down-payment assistance plans to mitigate insurance risks and reduce claims. Many mortgage brokers want FHA to expand their credit criteria and FHA guidelines even more. Is that realistic with the current climate of delinquencies, loan defaults and home foreclosures?

According to HUD, FHA guidelines still “do not have minimum credit score requirements.” However HUD does stipulate that past credit history is considered when underwriting FHA home loans.  FHA guidelines are based on the borrower’s ability and willingness to repay the mortgage loan.  “FHA lenders are empowered to make a credit determination based on the merits of each borrower.”  FHA lenders have the ability to disregard low credit scores if the borrower demonstrates significant compensating factors that outweigh the bad credit.  Do wholesale FHA lenders like B of A, Wells Fargo, Countrywide, Chase or SunTrust ignore credit scores and extend no credit requirements to brokers and loan officers?  NO –That is the myth…HUD does not have minimum credit score requirements but most FHA lenders have implemented their own credit score minimums in an effort to mitigate risks and reduce default ratios.  In most cases, if a borrower has a FICO score below 500 than the FHA underwriter typically requests an additional 10% of home equity or for a down-payment to show the applicant’s compensating factors.

o    Credit Score Average for FHA Loans is 670

o    Average Credit Score for Home Buying is 695

o    Credit Score Average for FHA Refinancing is 662