FHA to Tighten Rules for Borrowers
The Federal Housing Administration will tighten the rules for its mortgage borrowers as it seeks to bolster the finances of the agency, HUD Secretary Shaun Donovan told the House Financial Services Committee on Dec. 2.
Specifically, the FHA has proposed increasing the up-front cash and minimum credit scores required of borrowers who receive FHA-backed mortgages, and to limit seller assistance to buyers, including paying closing costs and giving free upgrades. The aim is to increase the amount that borrowers invest in the homes they buy in order to discourage them from defaulting on loans or walking away from mortgages in markets where home values are declining and the loan goes “underwater,” with the amount exceeding the value of the home.
With the FHA now backing about 30% of all mortgages for home purchases and 20% of refinancing loans, tighter risk controls are needed today than prior to the housing downturn when the agency had a much smaller volume of business, Donovan said. To date, however, FHA officials have not yet decided how much to increase up-front cash requirements for borrowers.
As for seller concessions, the agency now allows sellers to provide 6% of the home's value; Donovan said he wants the maximum permissible level lowered to 3%, in line with industry norms.
In addition, the agency is reviewing whether to increase the monthly insurance premiums charged to borrowers. Meanwhile, to protect itself against the riskiest borrowers, the FHA has decided "for the time being" to raise its minimum credit score requirements for new borrowers — but again, what the new threshold should be is still being determined. To read Donovan’s testimony, click here.
The proposed changes would have a significant impact on borrowers' ability to obtain FHA-insured loans. However, several of the proposals would require changes in the law, and the HUD secretary did not provide a timeline for the implementation of any of the changes he mentioned.
Going forward, NAHB will continue to interact with HUD and the FHA to ensure that viable mortgage borrowers are not prevented from using this essential financing assistance.
For more information, e-mail Bill Renner at NAHB, or call him at 800-368-5242 x8597.