FHA Changes in Down Payment and Credit Score Requirements

Posted on January 22 By MLP Blog

Beginning this spring, prospective FHA borrowers will face stricter standards and more upfront costs when the time comes to purchase a home.

The Federal Housing Administration this week announced a series of changes designed to strengthen its financial standing and weed out vulnerable borrowers.

The FHA has assumed an increasingly vital role in the last two years, propping up the housing market amid a vicious downturn. The agency insured more than 5.5 million single-family homes through mid-December. But more than 500,000 were delinquent and headed for foreclosure.

“Striking the right balance between managing the FHA’s risk, continuing to provide access to undeserved communities, and supporting the nation’s economic recovery is critically important,” FHA Commissioner David Stevens said in a news release . “When combined with the risk management measures announced in September of last year, these changes are among the most significant steps to address risk in the agency’s history.”

The new guidelines will force consumers to spend more money upfront, shifting some of the risk away from the FHA. Here’s a look at the major changes:

Mortgage Insurance Premiums Are Going Up The upfront premium cost of an FHA loan will jump to 2.25 percent from 1.75 percent. This increase will go into effect in the spring.

Credit Score and Down Payment Shifts The FHA’s signature 3.5 percent down payment will remain in place — as long as the borrower has a FICO score of at least 580. Those with scores below the threshold will have to put down at least 10 percent. That’s still better than conventional loans, which typically require a down payment of at least 15 percent. This is set to take effect in early summer.

Concessions Get Trimmed FHA buyers won’t be able to get as much closing cost relief come this summer. Currently, sellers can pay closing costs and concessions up to 6 percent. The new FHA guidelines will roll that back to just 3 percent. Officials hope the move helps curb appraisal inflation.

Greater Oversight of FHA Lenders The FHA will also introduce new layers of accountability for its lenders. Starting February 1, the agency will begin publishing lender performance rankings on the Housing and Urban Development website.

Along with these new changes, FHA officials say they’re keeping a close eye on underwriting standards and methods to keep underwater and overburdened homeowners afloat.

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