FHA to Hike Downpayment for Buyers with Poor Credit

The 3.5 percent minimum downpayment — highly favorable terms from one of the few sources of loans out there today — will remain for borrowers with a 580 credit score or higher.

But for those with lower credit scores, the minimum down payment will be hiked to 10 percent as of this summer if the borrower wants to participate in FHA’s mortgage insurance program.

Realtors have opposed efforts to increase the down-payment, insisting it would exclude too many borrowers without truly improving FHA’s reserves. There had been a proposal to raise the downpayment to 5 percent for all borrowers, but that appears to have been dropped with Tuesday’s announcement.

“Striking the right balance between managing the FHA’s risk, continuing to provide access to underserved communities, and supporting the nation’s economic recovery is critically important,” said FHA Commissioner David Stevens.

“These changes are among the most significant steps to address risk in the agency’s history,” he said. “Additionally, by continuing to provide affordable, responsible mortgage products, FHA will support the housing market’s recovery. Importantly, FHA will remain the largest source of home purchase financing for underserved communities.”

 

FHA policy changes include:

• Mortgage insurance premium will be increased to build up capital reserves and bring back private lending. The first step will be to raise the up-front MIP to 2.25% and request legislative authority to increase the maximum annual MIP that the FHA can charge. If this authority is granted, then the second step will be to shift some of the premium increase from the up-front MIP to the annual MIP. This shift will allow for the capital reserves to increase with less impact to the consumer, because the annual MIP is paid over the life of the loan instead of at the time of closing. The initial up-front increase will go into effect in the spring.

• Update the combination of FICO scores and down payments for new borrowers. New borrowers will now be required to have a minimum FICO score of 580 to qualify for FHA’s 3.5% down payment program. New borrowers with less than a 580 FICO score will be required to put down at least 10%. This allows the FHA to better balance its risk and continue to provide access for those borrowers who have historically performed well. This change will be posted in the Federal Register in February and, after a notice and comment period, would go into effect in the early summer.

• Reduce allowable seller concessions from 6 percent to 3 percent. The cur-rent level exposes the FHA to excess risk by creating incentives to inflate appraised value. This change will bring FHA into conformity with industry standards on seller concessions. This change will go into effect in the early summer.

• Increase enforcement on FHA lenders. Publicly report lender performance rankings to complement currently available Neighborhood Watch data - Will be available on the HUD website on February 1. This is an operational change to make information more user-friendly and hold lenders more accountable.

• Enhance monitoring of lender performance and compliance with FHA guidelines and standards. HUD is pursuing legislative authority to increase enforcement on FHA lenders. Specific authority includes: Requiring all approved mortgagees to assume liability for all of the loans that they originate and underwrite; authority to withdraw originating and underwriting approval for a lender nationwide on the basis of the performance of its regional branches.

In addition to the changes proposed Tuesday, the FHA is continuing to review its overall response to housing market conditions, and continuing to evaluate its mortgage insurance underwriting standards and its measures to help distressed and underwater borrowers going forward.