Sunday, August 15, 2010

Update on Tighter FHA Lending Standards

by Bill McBride on 8/15/2010 08:54:00 AM

Last month, on July 15th, HUD filed a public notice in the Federal Register of tighter FHA lending requirements. The 30 day comment period is over.

Jennifer Waters at the WSJ writes: FHA Gets Tougher on Mortgages

Consumers looking for home loans backed by the Federal Housing Administration will face tougher hurdles and higher costs under new legislation and new rules that could take effect as soon as this month.
The changes could happen this week.

As a review, the changes included (from HUD):
1. Update the combination of credit and down payment requirements for new borrowers. New borrowers seeking FHA-insured financing will be required to have a minimum FICO score of 580 to qualify for FHA’s flagship 3.5 percent down payment program. New borrowers with credit scores of less than a 580 will be required to make a cash investment of at least 10 percent. Borrowers with credit scores of less than 500 will no longer qualify for an FHA-insured mortgage.

2. Reduce allowable seller concessions from six to three percent. Allowing sellers to contribute up to six percent of the home’s sales price to offset a buyer’s costs exposes the FHA to excess risk by potentially driving up the cost of the home beyond its appraised value. Reducing seller concessions to three percent will bring FHA into conformity with industry standards.

3. Tighten underwriting standards for manually underwritten loans. When using compensating factors in the underwriting process, lenders will be required to consider those factors which are the best predictive indicators of loan performance, such as the borrower’s credit history, loan-to-value (LTV) percentage, debt-to income ratio, and cash reserves.