FHA Announces New Credit Requirements, Higher Costs For Loans

The Federal Housing Authority (FHA) has announced new rules governing loans they back which could take effect as early as this month. The rules could have a significant impact for those looking to secure an FHA loan as they increase the costs and associated with FHA loans.

Among the legislation’s new policies are higher monthly fees, higher credit score requirements, and larger down payments, all of which supporters of the legislation claim are vital to keeping the FHA solvent. The organization’s reserves, which are used to cover defaulted loans, fell all the way to $3.5 billion in June, compared to around $19.2 billion in September 2008.

The legislation’s proponents have lauded the efforts of the FHA to save taxpayers the cost of a bailout while also improving the quality of its insurance portfolio. Critics meanwhile argue that the changes could trigger a setback in the sluggish recovery in housing and will prevent many first-time buyers from qualifying for an FHA loan. The FHA currently insures about 30 percent of all home loans and is on pace to insure a total of 1.7 million loans by the end of its fiscal year on September 30th.

Among the changes called for in the legislation is an increase in m0onthly fees for FHA-backed loans. Congress approved the monthly fee increase earlier this month, and President Obama is expected to sign off soon. FHA-insured loans generally require smaller down payments than other loans, but require borrowers to pay an upfront fee and monthly fees. The new rules allow the FHA to increase monthly fees by as much as an annualized 1.5 percent of the loan’s balance, up from .55 percent, though initially the hike will be to just .9 percent.

The upfront fee required for FHA loans was hiked from 1.75 percent to 2.25 percent earlier this year, but the FHA says it will lower it back down to 1 percent when the new monthly fees take effect. In spite of the reduction in the initial fee, the FHA estimates that an additional $300 million per month in capital will be generated when the new monthly fees kick in.

Another key change outlined in the new legislation involves higher credit score requirements. In the 76 year history of FHA loans, the organization has never required credit scores from borrowers, though some lenders have had their own criteria. That would change under one of the new proposals. Borrowers would be required to have a credit score of at least 500 to qualify for FHA backing. Borrowers with credit scores between 500 and 580 would be required to put down 10 percent, while those with credit scores over 580 would qualify for the minimum 3.5 percent down payment. These credit requirements still fall well below the 660 to 720 typically required by most lenders.