The Federal Housing Administration has announced that it will require higher credit scores and tighten credit requirements in general for both lenders and borrowers, effective January 1.

It's about to get more difficult to obtain an FHA home mortgage. Just how much isn't yet clear.

The Federal Housing Administration announced on Friday that it will require higher credit scores and tighten credit requirements in general for both lenders and borrowers, effective January 1. The new rules are intended to help the FHA replenish the capital reserves it is required to maintain on hand, which are expected to fall below 2 percent of outstanding loans, the minimum level mandated by Congress, by the end of the month.

Tighter rules for streamline refinance

The agency will also tighten up some of its currently loose requirements for streamlined mortgage refinances, including collecting credit score information when available. Other new rules will address the length of time a mortgage has been held prior to refinancing (known as seasoning), payment history, income verification and a requirement for a demonstration of a net tangible benefit to the borrower.

Previously, the rules for an FHA streamline refinance allowed refinancing of nearly any FHA loan with few limitations or restrictions.

The FHA will also increase it already modest capital requirements for approved borrowers, shorten the length of time an appraisal will be considered valid and hire a chief risk officer for the first time in its 75-year history.

"To be clear, the fund's reserves are sufficient to cover our future losses, so the FHA will not require taxpayer assistance or new Congressional action," said FHA Commissioner David Stevens. "That said, given the size and scope of the FHA and its importance to today's market, these risk management and credit policy changes are important steps in strengthening the FHA fund, by ensuring that lenders have proper and sufficient protections."

Higher net worth to be required of lenders

Within the next year, the FHA will raise the minimum net worth requirement for approved lenders to $1 million, up from the $250,000 limit established in 1993. Further increases will bring the minimum net worth requirement in line with those of other government-backed lenders, such as Freddie Mac and Fannie Mae. The move is expected to eliminate many of the smallest lenders presently authorized to issue FHA loans, but help reduce risk.

The FHA will also shorten the length of time a home appraisal will remain valid to four months, down from the current 12. The move is intended to help ensure the accuracy of the appraisals on which loans are based.

At the same time, the FHA will raise its loan-to-value maximum on refinancings to 125 percent, in line with Fannie Mae and Freddie Mac guidelines being adopted under the Making Home Affordable homeowner assistance program.

Industry group hails changes

The new rules were hailed by the Mortgage Bankers Association, which said the changes will help the FHA remain viable for years to come.

Today's announcement shows that FHA intends to take significant steps to strengthen its risk management processes and enhance its future financial stability," said MBA Chairman David Kittle in a prepared statement.

"For several years, MBA has been advocating for higher net worth requirements for FHA lenders." he said. "It is important that lenders and brokers be made to have sufficient financial backing so they can be held accountable in the event of problem loans."

Low down payment will not change

The FHA announced no plans to raise its 3.5 percent minimum down payment on mortgages it insures, currently one of the lowest available following the collapse of credit markets last fall. That low down payment is a major factor in the increasing popularity of FHA loans, which made up to nearly one-quarter of all U.S. mortgages currently issued, up from approximately 2 percent only three years ago.

As the popularity of FHA mortgage has increased, so have the credit ratings of its borrowers. CNN reported that the average credit score of FHA borrowers is now 690, compared to 630 in 2007, with only 7.5 percent of all FHA mortgage borrowers having credit scores below 620, compared to 50 percent two years ago.

Published on September 21, 2009