FHA Guidelines Tighten Credit

The Obama administration is moving to tighten credit standards on FHA loans by increasing the amount of upfront cash homebuyers must bring to the table, raising minimum credit scores for new borrowers and reducing maximum seller concessions from 6% to 3%.  The most obvious way to increase upfront cash requirements would be to raise the 3.5% minimum down-payment requirement for loans guaranteed by FHA. 

A bill introduced Oct. 1 by Rep. Scott Garrett, R-N.J., would raise the minimum down-payment for FHA loans to 5% and prohibit financing of closing costs. HR 3706, which has 27 co-sponsors, has been referred to the House Financial Services Committee.  Housing Secretary Shaun Donovan, briefing committee members on the administration’s plans Wednesday, said there are several ways to make sure borrowers have more “skin in the game” currently under consideration.  HUD has “made the decision to exercise our authority to increase the upfront cash that a borrower has to bring to the table in an FHA loan,” Donovan said, but there “are several ways to accomplish this, and so we are currently analyzing various options to determine which is the most effective and consistent with our mission.”

Testifying on behalf of the National Association of Realtors, Vicki Cox Golder urged Congress and the administration to “exercise caution before introducing proposals that may have a profound adverse impact on our economic recovery.”  NAR is strongly opposed to HR 3706, she said, because increasing FHA’s down-payment requirements would make it impossible for many borrowers to use the program, and “not add a penny to FHA’s reserves.”  Dan Green, a Cincinnati-based loan officer for Mobium Mortgage Group Inc., said an increase in minimum FICO could have “a much larger impact than increasing down-payment requirements from 3.5 to 5%.  The minimum FICO score for FHA mortgage loans was raised from 500 to 580 earlier this year, he said, although most lenders already have even higher minimums.  “Most consumers are going to walk into their bank, and their bank will say 620″ is the minimum score needed to obtain a mortgage, Green said.

FHA loan programs find themselves in a difficult position, Green said, because Fannie Mae and Freddie Mac continue to tighten their guidelines, and that pushes more borrowers who are less creditworthy into FHA loans.  “They are trying to limit their exposure to the riskiest borrowers,” Green said. “Your median FHA borrower looks decidedly worse today than 18 months ago.  Green noted that Fannie Mae will implement a minimum 620 FICO score and other underwriting changes over the weekend of December 12th as part of its rollout of its Desktop Underwriter Version 8.0 software. 

With claims on its mortgage insurance fund rising, HUD is also considering raising FHA mortgage insurance premiums, Donovan told the committee.  Borrowers currently pay an upfront premium of 1.75%, plus annual premiums of 0% on FHA home loans with loan-to-value ratios of up to 95%. The annual premium on loans with higher LTVs is 0.55%.  Although HUD has the authority to raise the upfront premium to as high as 3% without additional input from lawmakers, annual premiums are at their statutory limits.  Donovan said HUD is requesting authority from lawmakers to raise annual premiums for new borrowers, “as this is one of the most effective means of raising capital” for the FHA’s capital reserve fund, which has dipped below statutory minimums.  Raising the annual premiums of FHA borrowers would likely be a greater hardship than increasing their upfront premiums, since the cost of upfront premiums can be financed into a mortgage, said Faramarz Moeen-Ziai, a mortgage banker at San Ramon, Calif.-based Bank of Commerce Mortgage.

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