FHA Changes to Mortgage Loan Requirements Are in the Air

iStock_000005410463XSmallHearings before the House Financial Services Committee could spell changes for FHA loan guidelines this year.

Testimony centers around proposals to raise the minimum down payment from 3.5% to 5% – and to 10% for borrowers with credit scores of 500-579. Borrowers with scores below 500 would be ineligible.

Some, citing the danger of inflated appraisals, also wish to lower a sellers’ maximum contribution to buyer’s closing costs from 6% to 3%. Mr. Charles McMillan, representing the National Association of Realtors, warned that such a move could cause a severe drop in home sales in areas of the country where home prices and closing costs are high.

Mr. McMillian also argued that credit scores are not a perfect indicator of the ability to repay a loan, and that raising the down payment to 10% for borrowers with scores below 580 will negate the intent of FHA financing – which is to serve those under-served by the private market

FHA Commissioner David H. Stevens, in an 18-page prepared speech, warned that raising the required down payment could seriously impact recovery of the housing market. According to an agency evaluation of recent loans, raising the down payment requirement would reduce the number of FHA loans by 40%.

Thus 300,000 buyers – the majority of whom were first time buyers, Hispanics, and African Americans – would not have received mortgage loans.

Instead of raising the down payment for borrowers with a minimum 580 FICO score, FHA now proposes to lower the up-front FHA mortgage insurance and increase the annual premium, which is paid monthly. At present, the up-front mortgage insurance premium is at 2.25% of the loan value and is financed into the loan balance.

This move would change the loan to value ratios, but would mean little to borrowers as they make their monthly payments – the mortgage insurance will still be an additional cost over the principal, interest, taxes and insurance included in their monthly payments.

The proposed changes are an effort to reduce risk while increasing revenues for FHA. Due to the recent mortgage crisis, FHA secondary reserves have fallen below the required 2% level. Stevens noted, however, that FHA has not been hit with the delinquencies and foreclosures that have plagued the subprime market. This is due to the fact that throughout the housing boom and the era of easy loans, FHA maintained loan standards such as requiring verification of borrower income and employment.

Eight individuals, representing various sectors of the real estate industry, presented their prepared comments – many of them conflicting and at least one citing record-keeping errors that skew the results of FHA evaluations. To read their remarks, go to http://www.house.gov/apps/list/hearing/financialsvcs_dem/hrhousing_030410.shtml

Author: Mike Clover

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