HUD Could Tighten FHA Loan Rules
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The Housing and Urban Development secretary Shaun Donovan is expected to tell Congress that the rules for FHA loans need to be tightened. Donovan believes that the FHA will not need more funding help from the government, but he does think that mortgage lenders need to be more accountable when originating FHA loans. Five Star Mortgage reports on the restrictions Donovan thinks are necessary:
- Increasing the minimum credit scores requirements on buyers.
- Requiring even larger minimum down payments. (current at 3.5%. Secretary Donovan is expected to ask for down payments exceeding 5%)
- Cutting in 1/2 the maximum allowable seller concessions for closing costs. (currently at 6% would be reduced to 3%)
- Increasing the required upfront and annual mortgage insurance premiums on all buyers.
In addition to further restricting FHA home buying guidelines, Secretary Donovan is expected to ask for additional crackdown on lenders originating FHA loans.
As part of the recommendations FHA will create a lender scorecard that will provide grading of lenders performance that do business with FHA. Additionally he will ask for the ability to hold lenders more accountable for their performance and actions as they relate to following FHA underwriting guidelines.
These changes are designed to reduce the risk that the FHA takes on when providing home loans. However, the tightened rules might be going a little too far. One of the reasons that FHA loans have been so popular right now is that they have smaller down payment options than most mortgage lenders (since the demise of the 0% down payment after the mortgage market meltdown). Requiring higher down payments and FICO scores could make it more difficult for some to obtain loans.
Of course, some contend, that’s not necessarily a bad thing. Perhaps some of these folks shouldn’t be getting loans. Forcing them to adopt more responsible money behaviors to qualify for FHA loans means that there is less risk of default down the road, and a better chance that the buyers can truly afford their homes.
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