The FHA has taken a number steps to address risk and strengthen its balance sheet, including requiring larger down payments and higher mortgage insurance premiums.
The upfront mortgage insurance premium (MIP) will be raised from 1.75 percent to 2.25 percent to “build up capital reserves and bring back private lending.”
The FHA will also request legislative authority to increase the maximum annual MIP so it can shift some of the cost, as annual premiums are paid over time, proving to be less of a barrier for prospective buyers.
New FHA borrowers will also be required to come in with a 10 percent down payment if their Fico score is below 580; those with scores of 580 and above can still qualify for the 3.5 percent minimum payment.
In other words, if you have terrible credit, you can still get a mortgage with just 3.5 percent down.
Finally, the FHA will reduce allowable seller concessions from six percent to three percent, in line with industry standards.
The current level essentially exposes the FHA to excess risk by creating incentives to inflate appraised values.
The proposed changes will go into effect in either spring or summer, giving lenders time to speed applications through the system under the current rules.
The FHA said it will continue to increase enforcement on FHA mortgage lenders, while publicly reporting lender performance rankings.
“When combined with the risk management measures announced in September of last year, these changes are among the most significant steps to address risk in the agency’s history,” said Commissioner David Stevens, in a statement.
Check out this chart from the FHA’s 2009 fiscal year detailing Fico score distribution (it doesn’t look like the new down payment requirement will have any impact, given very few borrowers have scores below 620, let alone 580):
(top photo: davidreece)