FHA Planning Stricter Loan Requirements

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The Federal Housing Administration is taking the first steps toward stricter loan requirements.  The FHA plans to “hold lenders accountable for their origination quality and compliance with FHA policy”.  These planned changes could put more pressure on an already struggling housing market.  Their plan is designed to limit the risks to the FHA loan portfolio, which has been below the legislated 2% threshold since the housing crisis began.

The FHA has drafted several new policies to help them raise their loan portfolio and protect them from further loan defaults that push their legislated 2% threshold even further down.  These policies, still in the planning stages, would improve the quality of their existing loan portfolio, improve the performance of future books and ensure that the FHA “continues to contribute to the nations housing recovery”.

The first set of policy changes will focus on “enforcement and lender accountability”.  The FHA will ensure that lenders assume responsibility for any losses associated with loans that were not underwritten according to FHA standards.

Borrowers can expect to see changes as well.  These changes include a measure to reduce the “maximum permissible seller concession from the current 6% level to 3%”, this will reduce the exposure of the FHA to the incentives created by lenders that inflate appraisal values. In an effort to protect itself from the riskiest borrowers, the FHA plans to raise the minimum FICO score for new FHA borrowers, making the daunting task of securing a loan as a first time home buyer as hard as it was during the 1970′s.

The change that could have the most significant impact on borrowers and the housing market recovery is the decision by the FHA to exercize their authority to increase the up-front cash that a borrower must produce in order to secure an FHA loan.  The FHA has not given specific numbers for this change but have reported that they are currently analyzing various options to determine the most effective and consistent way to implement this change.

One other possible change borrowers may see is an increase in the mortgage insurance premium.  Whether this change will effect the up-front premium, the annual premium or both is still under discussion.  The FHA promises to provide more detail and public guidance for these changes by the end of January 2010.

Related posts:

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  2. Permanent Loan Modifications Difficult To Achieve
  3. Lenders Resist Making Home Affordable
  4. FHA Announces Tighter Restrictions On Lending
  5. FTC Proposes Up-Front Fee Ban for Mortgage Modifications

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