Federal Housing Administration (FHA) Commissioner David H. Stevens has unveiled three specific policy changes to strengthen the FHA's capital reserves while enabling the agency to continue to fulfill its mission to provide access to homeownership for underserved communities. The U.S. Department of Housing & Urban Development (HUD) published a Notice, seeking public comment on three specific measures to reduce financial risk and preserve affordable mortgage financing for responsible consumers.
In addition to earlier steps taken to manage its risks and to boost reserves, FHA is proposing to update the combination of credit and downpayment requirements for new borrowers; reduce seller concessions from six to three percent; and tighten underwriting standards for manually underwritten mortgage loans.
"These are the latest in a series of changes to allow the FHA to manage its risk better while continuing to support the nation's housing recovery," said Stevens. "By protecting FHA's capital reserves, we can continue providing affordable, responsible mortgage products and will remain the nation's largest source of home purchase financing for underserved communities."
For the next 30 days, HUD is seeking public comment on the following policy changes, each of which are designed to mitigate risk to the Mutual Mortgage Insurance Fund while promoting sustainable homeownership for FHA borrowers:
1. Update the combination of credit and downpayment 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 downpayment 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 (DTI) ratio, and cash reserves.
For more information, visit www.hud.gov.