Filed Under Buying, Lending · Tagged: credit score, fha, FICO, Financing, HUD, lenders, Lending · Print This Article
On Wednesday, a new set of policy changes were announced by the FHA. These are designed to decrease risk and continue to support the market while strengthening capital reserves. The reserves were dipping below a congressionally mandated level. We break down the FHA press release here:
The FHA proposes to take the following steps:
- Increase the mortgage insurance premium.
- Update the combination of FICO scores and down payments for new borrowers.
- Reduce seller concessions from 6 to 3 percent.
- Implement a series of significant measures aimed at increasing lender enforcement.
1.) Mortgage insurance premium (MIP) will be increased to build up capital reserves and bring back private lending.
The first step will be to raise up-front MIP and request legislative authority to increase the maximum MIP the FHA can charge. If the authority is granted, then the FHA wants to shift some of that premium increase from the up-front to the annual MIP — this will allow for the reserves to increase with less impact to the consumer, who will then pay over the life of the loan instead of a larger amount at closing.
2.) Update the combination of FICO scores and down-payments for new borrowers.
This is an impactful part of the changes. New borrows will be required to have a minimum FICO (credit) 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 is still more relaxed than a borrow could likely get from a financial institution.) This allows the FHA to better balance its risk but still continue to provide access to borrowers who have shown responsibility. This change will be posted in the Federal Register in February and go into effect early summer.
3.) Reduce allowable seller concessions from 6% to 3%
The current level, 6% allowable seller concessions (a.k.a. closing costs), potentially exposes the FHA to excess risk by creating incentives to inflate appraised value. This change will bring FHA more in-line with industry standard that exist for seller-paid closing costs.
4.) Increase enforcement on FHA lenders
The FHA wants to put more pressure on lenders to follow the rules. It intends to do this by publicly reporting lender performance rankings on the HUD website to complement currently available Neighborhood Watch data. (This is an operational change to make the information more accessible — it doesn’t require new regulation as this data is already available publicly).
FHA also intends to enhance monitoring of lender performance and lender compliance with FHA guidelines. FHA is also pursuing legislative authority to increase enforcement of the following: require all approve mortgagees to assume liability for all loans they originate and underwrite; permitting HUD maximum flexibility to establish separate ‘areas’ for purposes of review and termination under the Credit Watch initiative — this would provide authority to withdraw originating and underwriting approval for a lender nationwide on the basis of the performance of its branches.
The FHA is continuing to review its overall response to market conditions. See the original release from which this information was taken for more detail. Also, consider reviewing the articles below for a further look into these adjustments in the FHA regulations. We’ll be looking at this issue more closely — stay tuned to the blog for more.
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