Yesterday the Federal Housing Administration (FHA) reported that it is going to raise their fees and tighten their lending standards to help stabilize their finances and avoid a bailout by the taxpayers.
As the foreclosure rate has increased so has the agency's losses and as a result the FHA's reserves have gone below the minimum level required by Congress.
The FHA is a vital component to the housing market because they insure close to 30 percent of new loans, and is also the largest backer of first-time home buyers mortgages as well.
FHA Commissioner David Stevens said in a prepared statement that, "these changes are among the most significant steps to address risk in the agency's history." These changes will go into effect sometime before June.
These new policies announced yesterday were created to help bring more revenue into the agency, while keeping loans available at the same time.
Here is how homebuyers will be affected by these new changes:
- The borrower will have to pay an upfront mortgage insurance premium of 2.25 percent of the entire loan amount. The current insurance premium is 1.75 percent. As an example, if a borrower gets a $200,000 mortgage they will be required to pay a mortgage insurance premium fee of $4,500, compared to only $3,500 based on the current system. The good news is the borrowers will still be able to put these fees back into the total amount that they are going to borrow.
- The borrower will also need a credit score of at least 580 in order to qualify. Right now there's already many FHA lenders that require a higher score, but there's never been a standard requirement across the entire program. Therefore, any borrowers with a score below 580 will need to put a down payment of at least 10 percent towards the loan.
Today, more than 18 percent of current FHA borrowers are at least one payment behind or are already in foreclosure.
Howard Glaser, a mortgage industry consultant and former housing official during the Clinton administration said that mortgage lenders "will find the new rules painful but necessary."
The FHA offers insurance against mortgage defaults and does not make loans. One thing that has not changed is that borrowers are still willing to pay for the insurance because FHA loans only require down payments of 3.5 percent of the purchase price.