Since late 2009, FHA has been reviewing new changes to its FHA home loan programs and on January 20, 2010 these changes were approved. 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 was made public, many people were already wondering if the FHA was being too lenient with its approval guidelines. There was no minimum credit score set for applicants, although most lenders required a score of 620 and required a down payment of only 3.5% 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 bad borrowers.
Although some components of the FHA program are similar to subprime loans, this is not a legitimate comparison. Subprime loans were made 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 brings it up to 2.25%. The increase will affect premiums on all FHA loans except the Home Equity Conversion Mortgage (HECM) and help add to FHA’s dwindling reserves.
FHA reduces risk
In addition to increasing the initial mortgage insurance premium, FHA is reducing the maximum seller’s concessions from 6% to 3% of the loan amount. They have also added credit score requirements to their approval guidelines. They now require at least a 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 a 10% down payment.
FHA increases liability
To make sure lenders don’t make loans to people who can’t afford 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.
FHA also intends to make lenders meet 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 interest of both FHA and the customer.
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 a quote for an FHA loan. If these efforts serve their purpose, they will remove scrutiny from the FHA loan program and allow them to continue contributing to a healthy housing market in the US. Hopefully, these new regulations will also significantly increase FHA reserves and provide homeowners opportunities to continue to take advantage of the FHA home loan program in the future.
