FHA Unveils Stricter Guidelines

The Federal Housing Administration (FHA) has issued new guidelines that will require higher down payments from riskier borrowers, reduce allowable seller concessions and increase enforcement on FHA lenders. The policy changes are designed to strengthen the mortgage insurance agency’s capital reserves, which have fallen below mandated levels, while enabling it to continue to provide access to homeownership for underserved communities. At a briefing this morning, FHA commissioner David H. Stevens said, “These changes are overdue…While change is difficult, these are the right moves and [they] will actually bring confidence back to the market.”

The FHA insures approximately 30 percent of new mortgage loans in the United States, Stevens said. The policy changes focus on four main initiatives.

1. The agency will increase the mortgage insurance premium (MIP) from 1.75 percent to 2.25 percent in an effort to increase its capital reserves. The change would go into effect in the spring.

2. New borrowers will be required to have a minimum credit score of 580 to qualify for FHA’s 3.5 percent down payment program. New borrowers with less than a 580 credit score will be required to put down at least 10 percent. The change would go into effect in early summer.

3. Allowable seller concessions, which typically are offered to help buyers cover closing costs or property upgrades, will be reduced from 6 percent to 3 percent. The change would go into effect in early summer.

4. The agency will increase enforcement of standards on its lenders.

Stevens said several government initiatives over the last year, including the homebuyer tax credit and the Making Home Affordable program, are having a positive impact on the housing market and the FHA. “The home sales for two quarters in a row have been a pleasant surprise,” Stevens said. “I see light at the end of the tunnel…Overall we think the trend is generally headed in the right direction.”