January 29th, 2010
New FHA rules affects consumers, housing market, and economy
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The Federal Housing Administration is undergoing major changes in 2010 to tighten lending standards, raise credit score requirements, and increase mortgage premium costs in an effort to strengthen the agency’s weakened financial state and reform the lax lending practices that contributed to the housing crisis.
The FHA does not provide mortgage loans itself, but offers government-backed insurance against defaults for mortgages issued by approved lenders. FHA loans appeal to new and first-time homebuyers because they require down payments of 3.5% of the home’s purchase price, in comparison to the industry standard of 20% or more. However, the agency has been criticized for backing mortgages with little or no down payments, which was the type of lending that contributed to the current wave of foreclosures. The agency is also financially strapped as more than 18% of FHA borrowers are at least one payment behind or in foreclosure compared with 14% default rate for all loans, reports USA Today.
A healthy FHA is vital for the housing market because the agency insures about 30% of new loans and is also the largest mortgage backer for first-time buyers. The following policies, effective spring and early summer this year, are designed to bring in more revenue and also reform loan underwriting:
- Mortgage-insurance premium. Borrowers must pay upfront mortgage insurance premium of 2.25% of the total loan amount, up from the current level of 1.75%. For example, if a borrower takes out a $200,000 mortgage, they would have to pay $4,500 premium rather than the current fee of $3,500. The premium is split between an up-front fee paid at closing and an on-going yearly fee. FHA officials may also increase the maximum annual premium that can be charged, pending congressional approval.
- Higher credit score. Borrowers need a minimum credit score of 580 to qualify for the FHA’s 3.5% down payment rate. Borrowers with a score lower than 580 are required to put a down payment of at least 10%. Compare this to standard lending guidelines which require at minimum of 720 to qualify. Increasing minimum credit scores will safeguard the FHA against borrower default, while still providing loans to most consumers.
- Enforcement on FHA lenders. FHA will publicly report lender-performance rankings on the HUD website and enhance monitoring of lender performance and compliance with FHA guidelines. After cracking down on 15 mortgage lenders with suspiciously high default rates for FHA loans and banning two companies from FHA’s program, this provision will increase oversight to make lenders more accountable.
- Seller concessions. Seller concessions for closing costs will be reduced from the current 6% to 3% to deter sellers from inflating a home’s appraised value, which increased the risk of borrower default.
The new rules will address risks and minimize losses in the struggling housing market, yet will also make it harder for consumers to qualify for a mortgage. Borrowers with poor credit will find the new tightened requirements could significantly impact their ability to buy a home. However, financial soundness for the FHA’s insured mortgages will prop up stable home buying, which will benefit the U.S economy as a whole in the long run.