In a bid to boost its capital reserves, the FHA has proposed three initiatives aimed at improving loan quality.
Most notably, new borrowers seeking FHA-insured financing will need a minimum Fico score of 580 to qualify for the “flagship 3.5 percent down payment program.”
Additionally, borrowers with Fico scores below 580 will need to bring in at least a 10 percent down payment, while those with credit scores below 500 will be out of luck entirely.
It could have been worse – a proposal (eventually shot down) to up the minimum down payment to five percent across the board would have reduced FHA endorsements by 40 percent.
As noted earlier, allowable seller concessions will be cut in half to three percent, in line with industry standards.
The previous six percent allowance exposed the FHA to excess risk by potentially driving up the cost of a home beyond its appraised value.
Finally, the FHA plans to implement tighter underwriting standards for manually underwritten loans.
When using compensating factors to qualify borrowers, mortgage lenders will be required to consider factors that are the “best predictive indicators of loan performance,” such as credit history, loan-to-value, debt-to-income ratio, and asset reserves.
These changes should allow the FHA to continue its mission of providing mortgage financing to underserved communities (and everyone else).