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FHA Goes Easy on Borrowers with Soft Changes


There’s been a lot of hubbub lately regarding the FHA, its seemingly high-risk lending, and its dwindling insurance fund (that would eventually be taxpayers’ problem).

And one senator in particular, Bob Corker, has been on a personal mission to see that the agency cleans up its act before it goes the way of the dodo.

However, it appears as if the FHA will continue to throw caution to the wind.

In a letter written to Corker on Tuesday, the FHA’s Acting Assistant Secretary Carol Galante presented some new changes that are slated to “go live” either immediately or by January 31, 2013.

A Minimum Credit Score?

Currently, the minimum credit score allowable for an FHA loan is 500, though most lenders have much higher requirements, so it’s not truly as low as it appears.

Additionally, those wishing to put the signature 3.5% down need at least a 580 credit score, which is still dismal by any standards.

To tidy things up, Galante has proposed that borrowers with credit scores below 620 have a maximum debt-to-income (DTI) ratio of no more than 43% in order to be approved via the FHA’s TOTAL Scorecard, which is an automated underwriting system.

If the borrower’s DTI exceeds 43%, lenders will be required to manually underwrite the loan application.

So basically the FHA will continue to accept borrowers with dismal credit scores, though Galante claims this change will reduce claim rates by roughly 20% for borrowers with sub-620 credit scores.

[How to get a mortgage with a low credit score.]

New Max LTV on Biggest Loans

Another change will affect the largest loans the FHA insures, those between $625,500 and $729,750.

At the moment, the FHA has max loan amount limits of $729,750, while Fannie Mae and Freddie Mac are limited to $625,500, the conforming limit.

In June, the FHA increased mortgage insurance premiums by .25% for these bigger loans, and now they’re taking things a step further.

That’s right, they’re lowering the max loan-to-value limit on these large loans to 95% from 96.5%.

I suppose a five percent minimum down payment is better than a 3.5% down payment, from a risk standpoint, but you have to wonder why they’re still insuring loans that are larger than Fannie and Freddie.

The FHA’s original mission was to serve the underserved, not those with the largest loan limits in the country.

Previously Foreclosed Borrowers

Galante also sent out a warning to lenders who are essentially promoting the fact that you can get an FHA loan just three years after foreclosure.

She pointed out that it’s only achievable if borrowers have re-established their credit, and that it’s not “automatically” possible after three years have passed.

The FHA is also “committed to performing additional data analysis to determine if the original cause of a borrower’s foreclosure was due to a one-time economic event,” such as unemployment, illness, etc.

If they discover any data trends, future policy changes may be possible. These borrowers will also be subject to the DTI changes noted above.

These types of borrowers would also likely need to take part in a new housing counseling initiative being structured by the FHA.

Moratorium on HECM Reverse Mortgage Program

Finally, the only real major change is the “immediate cessation” of the FHA’s Standard Fixed Rate HECM, which is their full-draw reverse mortgage program.

The product represents the lion’s share of loans insured via the agency’s HECM program, so reverse mortgage lenders will likely feel the brunt.

Going forward, older borrowers will be still able to tap home equity via the FHA’s Variable Rate Standard product and HECM Saver product, which should result in smaller draws and therefore less risk.

So that’s that. The latest FHA changes are pretty generous considering how damning Corker’s words were during HUD Secretary Shaun Donovan’s testimony.

I’m frankly somewhat surprised that they didn’t take more aggressive measures, but that’s mortgage for you…

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