FHA to Increase Minimum Down Payment, Credit Score Requirement, Insurance Premiums

December 2, 2009 No Comments »

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As a means to boost capital and improve the quality of future loans, the FHA is expected to make a series of major underwriting changes.

The FHA plans to raise the minimum Fico score for new FHA borrowers, though it’s unclear what that three-digit number will be, and if it’ll be dependent on other factors.

“We are currently analyzing what this floor should be, including the relationship between FICO scores and downpayments to determine whether we should increase FICO minimums in combination with changes to other underwriting criteria for lower downpayment loans,” said HUD Secretary Shaun Donovan, in prepared remarks to Congress.

The FHA is also calling for borrowers to have more “skin in the game,” meaning a higher down payment requirement (currently set at 3.5%) will probably be implemented.

Donovan noted in his testimony that the absence of seller-financed downpayment assistance loans would have kept the FHA’s capital ratio above the two percent minimum.

Maximum seller concessions on FHA loans are expected to be reduced from six percent to three percent, as the current above-market level exposes the agency to excess risk by creating incentives to inflate appraised values.

Additionally, the FHA has requested authority from Congress to raise the annual mortgage insurance premium it charges borrowers to protect against future uncertainty in the mortgage market.

Those who originate FHA loans will also be held to a higher standard, with plans to post a “Lender Scorecard” on the HUD website to ensure transparency and accountability (higher net-worth requirements were previously announced).

The agency will also continue to step up enforcement efforts; they’ve already suspended seven mortgage lenders, including Taylor, Bean, and Whitaker, and most recently Lend America, and have withdrawn FHA-approval for 270 others.

The FHA currently insures nearly 30 percent of purchases and 20 percent of refinances in the residential mortgage market, so the decisions they make are critical.

More details regarding the changes are expected by the end of January.

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