Proposed Changes to FHA Lending Guidlines

Testifying before the Housing Financial Services Committee yesterday, Secretary of Housing and Urban Development (HUD) Shaun Donovan announced possible policy changes for Federal Housing Administration’s (FHA) borrowers.Rising defaults on FHA loans have led to the FHA’s cash reserves falling below federally mandated levels. FHA officials hope that policy changes will ensure borrowers have a stronger equity position and are less likely to default.Proposed changes include:· Raising the minimum credit scores requirements: Currently borrowers with FICO scores as low as 500 may qualify for an FHA-insured loan. The new minimum credit score has yet to be determined.· Increasing down payment requirements: FHA borrowers currently can put down as little as 3.5 percent. A proposed change would raise that amount to a minimum of 5 percent.· Limiting the amount sellers can provide as concessions: The agency is considering lowering the maximum permissible level to 3 percent from its current 6 percent limit.· Raising up-front insurance premiums: Agency staff is reviewing whether to increase the monthly insurance premiums charged to borrowers, which come on top of insurance paid up front. The current up-front premium is set at 1.75 percent of the value of the loan. The FHA may decide to increase that premium. The amount has yet to be determined.According to Donovan, the rules will not be finalized until the FHA determines how to craft them in a way that weeds out the most problematic borrowers while ensuring that qualified borrowers will not be inadvertently shut out, thereby derailing the housing market's recovery.Fore more information about the changes to FHA borrowers, please visit the following:
Wall Street Journal: FHA Considers Ways to Boost Its Reserves
Washington Post: HUD chief defends efforts to aid borrowers
Los Angeles Times: Home buyers will have to lay out more cash for an FHA mortgage