Tighter FHA Loan Rules Debated
Tighter lending requirements for loans insured by the Federal Housing Administration may leave some borrowers unable to get mortgages, but economists are divided on the impact they could have on housing’s recovery. The changes, aimed at strengthening the FHA’s reserves in the face of rising foreclosures, shouldn’t hurt too many borrowers.
The FHA is playing a greater role in the mortgage market, insuring about 30% of new loans, up from 3 percent in 2007. Growing defaults have cut its reserves below the level mandated by Congress, leading to fears that it might need a taxpayer bailout.
FHA-insured mortgages are attractive to borrowers, however, because down payments are only 3.5%. That won’t change under the new policies the FHA announced Wednesday, which are to take effect in spring or early summer. Among them:
• New borrowers will have to have a minimum credit score of 580 to qualify for a 3.5% down payment. Those with lower scores will have to make at least a 10% down payment. The average credit score of FHA-insured borrowers is 693.
• Allowable seller concessions will be reduced from 6% to 3% of the sale price. The change is intended to discourage inflated appraisals.
• Buyers will have to pay an upfront mortgage insurance premium of 2.25% of the total loan amount, up from 1.75% now. A $150,000 mortgage would require a payment of $3,375, or $750 more.
While the stiffer requirements may leave some borrowers out of the marketplace, some economists say the measures are necessary to protect the FHA from losses.
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