FHA announces tighter standards

FHA has announced it will impose tighter standards via policy changes meant to strengthen its financial position.

Let’s take a look at the changes and what they mean to home-buyers who might use an FHA insured loan.

1. Mortgage insurance premium (MIP) will be increased to build up capital reserves and bring back private lending.

FHA is increasing the upfront mortgage insurance premium to 2.25%. FHA intends to release guidance tomorrow in regards to whether this will be required upfront, or if there will be some method of breaking it up. One proposal is to spread some of the fee over a number of years. Regardless, it will now cost more in either closing costs or MIP on a monthly basis, for borrowers who wish to use an FHA insured loan.

2. Update the combination of FICO scores and down payments for new borrowers.

Does this mean increase in credit score? Yep. FHA is requiring new borrowers to have a minimum FICO credit score of 580 in order to qualify for the 3.5% down payment program. If the score is less than 580 the borrower will be required to put down 10%. This change is intended to help the agency balance risk and is expected to go into effect in the early part of the summer.

3. Reduce allowable seller concessions from 6% to 3%.

FHA contends this change will bring them within the standard of industry norms regarding seller concessions and will decrease the tendency to inflate the appraised value of homes. This change is also expected to become final in the early part of the summer.

4. Increase enforcement on FHA lenders

In addition to the direct effects of the policy changes above, FHA will also make a number of regulatory changes in regards to lenders that can be reviewed here at HUD.gov