Since the end of 2009, the FHA has been discussing further changes to its FHA mortgage loan programs and these changes were approved on January 20, 2010. The FHA decided to make changes to its program after a 2009 internal audit showed that its reserves had fallen to a level that was about a quarter of the amount required by Congress.
FHA under scrutiny
Before the internal audit became public, many people were already wondering if the FHA was being too lenient with its approval guidelines. No minimum credit score was set for applicants, although most lenders required a score of 620 and required only a 3.5% down payment on purchases. Some said the FHA home loan program was too similar to subprime loans of the past in that it allowed credit to be extended to uncreditworthy borrowers.
Although some components of the FHA program are similar to subprime loans, this is not a legitimate comparison. Subprime loans were given to people who couldn’t repay the loans. FHA loans require complete documentation of income, employment, and assets to ensure that even if the applicant has less than perfect credit, they can still afford the loan payments.
The goal is to increase reserves
Announced yesterday by David Stevens, the biggest change implemented for FHA home loans is a 5% increase in the initial mortgage insurance premium. Previously, this premium was 1.75% of the loan amount; this change raises it to 2.25%. The increase will affect premiums on all FHA loans except the Home Equity Conversion Mortgage (HECM), and will help increase FHA’s dwindling reserves.
FHA reduces risk
In addition to increasing the initial mortgage insurance premium, the FHA is reducing the maximum seller awards from 6% to 3% of the loan amount. They have also added credit score requirements to their approval guidelines. They now require at least 580 to be eligible for the 3.5% down payment. If the applicant’s credit score is below 580, they will need to contribute at least 10% down.
FHA Increases Liability
To make sure that lenders don’t make loans to people who can’t repay them, FHA will publicly report each lender’s performance ratings. The purpose of this effort is to hold lenders accountable for their own lending practices.
The FHA also intends to hold lenders to a more stringent set of criteria to continue issuing FHA loans. This is an effort to help ensure that they consistently act in the best interests of both FHA and the client.
These regulations will be effective for loans assigned case numbers on or after April 5, 2010. A case number is assigned the first time an applicant receives an FHA loan quote. If these efforts serve their purpose, they will remove scrutiny from the FHA loan program and allow them to continue to contribute to a healthy housing market in the US Hopefully, these new regulations will also significantly increase FHA’s reserves and provide homeowners opportunities to continue taking advantage of the FHA home loan program in the future.