FHA to Raise Lending Requirements for Home Mortgages

By:
Kirk Haverkamp | December 03, 2009

Getting an FHA home mortgage is about to get more costly and difficult, as regulators take steps to rebuild the federal agency’s shrunken financial reserves and reduce the risk of defaults on FHA-insured mortgages.

Those measures will likely include increasing the almost negligible 3.5 percent minimum down payment currently required on FHA, as well as raising the annual mortgage insurance premium paid by FHA borrowers for new loans. The agency also plans to raise its minimum FICO credit score requirements and cut back on allowable seller concessions.
 
Those new measures were disclosed yesterday by Housing and Urban Development Secretary Shaun Donovan during testimony before the House Financial Services Committee. There has been growing concern over the state of the agency’s finances in the wake of rising mortgage defaults and the downturn of the U.S. economy.
 

Reserve fund depleted

 
The FHA has seen its capital reserves, used to cover losses from bad mortgages, fall to 0.53 percent of the total balance on insured loans, below its congressionally mandated minimum of 2 percent. However, Donovan said an independent audit concluded there is little danger of the self-funded agency becoming insolvent, noting that another fund brings its total reserves to 4.5 percent of outstanding loans.
 
Donovan said FHA mortgages have performed relatively well compared to the market overall, noting that delinquencies on subprime mortgages are running 240 percent higher than FHA delinquencies.
 
“While others participated in investor-owned markets or were exposed to exotic mortgages such as option-ARMs and interest-only loans, and while some tolerated lax underwriting standards, FHA stuck to the basics during the housing boom: 30-year, fixed rate traditional loan products with standard underwriting requirements,” Donovan said. “Unlike subprime lenders, FHA requires that borrowers demonstrate they can pay their mortgage by verifying their income and employment.”
 

No more 3.5 percent down payments?

 
Donovan did not say what the new mortgage loan standards will be, only that the agency will be raising them. He said the agency has decided to increase the amount of cash up-front a borrower must provide to obtain an FHA loan in order to increase the borrower’s equity stake in the purchase. That usually means increasing the down payment requirement, although Donovan said the agency is considering several means of doing this.
 
He also said the agency is evaluating what the new minimum FICO score requirements should be to qualify for an FHA loan and is seeking authority from Congress to raise the mortgage insurance premium it charges borrowers. That premium is currently 1.75 percent of the total loan amount, charged up front, but the FHA already has authority to raise it as high as 3 percent. It’s not clear if the FHA is actually contemplating raising the premium above that level or if it simply wishes to have the ability to do so if needed.
 
One thing the agency will be doing, Donovan said, is reducing the maximum allowed seller concessions on an FHA home purchase from 6 percent of the sale price to 3 percent, and perhaps further. Seller concessions are expenses such as closing costs that the seller agrees to cover for the buyer, but can have the effect of inflating the home sales price.
 

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