Tougher Guidelines on the Horizon for FHA Loans

HUD Secretary Shaun Donavan testifed before House Finance Committee earlier today pledging to continue making adjustments to toughen up FHA insured loans.  

Here is the future of FHA: 

• reducing the maximum seller contribution towards allowable closing costs to 3% (it's currently at 6%);
• increasing the minimum credit score;
• increasing the minimum down payment requirements so borrowers have more "skin in the game" (currently with purchases, borrowers are required to invest a minimum of 3.5% of the sales price);
• considering increasing both the upfront mortgage insurance premium (currently 1.75% and typically financed into the loan) and/or the monthly mortgage insurance premium (currently 0.50-0.55% of the base loan amount/12).

From Secretary Donovan's prepared testimony:

Indeed, while most of these changes I’ve just described we can make on our own with no additional authority—and we expect to provide detail and public guidance for these changes by the end of January—in some cases, we will need Congress’ help.  In addition to asking Congress to increase the current cap on the annual mortgage insurance premium for new borrowers, we are asking for additional authority for our proposals to hold all FHA lenders responsible for their fraud or misrepresentations by indemnifying the FHA fund.  We will also be asking Congress to expand FHA’s ability to hold lenders accountable nationally for their performance as I mentioned earlier.

Around the summer of 2008, FHA had implemented risk based based pricing on mortgage insurance.   However the passage of HR 3221, The Housing and Economic Recovery Act of 2008, placed a 1 year moratorium on risked base pricing for FHA mortgage insurance.   The one year moratorium has quietly passed without the risked based mortgage insurance going into effect–you can see the writing on the wall.

Just last month, FHA tighted up FHA streamline refinances.  I agree that borrowers should show they qualify but I think the changes with appraisals being required if the closing costs are to be financed into the new loan is really bad timing.

If you're considering a mortgage, delaying to try to get a slightly better rate can cause you to not qualify at all.  We will continue to see with both government and conventional loans tougher guidelines.   Waiting longer will mean more hoops to jump through.