FHA Guidelines: Pending Changes Cause for Confusion?

by Karen Lawson
August 3rd, 2010

The Washington Post recently clarified several proposed changes to FHA guidelines, and spells out how they may impact potential borrowers of FHA loans. The changes FHA is seeking appear to balance the needs of first time and under-served homeowners with responsible risk management. Although giving away the store is not a great idea, FHA adheres to its mission of providing access to home ownership when times are tough. If you’re considering buying or refinancing a home with an FHA loan, there are a few things to know about FHA guidelines and mortgage lenders’ underwriting requirements:

  • Borrowers with credit scores less than 580 will be subject to a 10% minimum down payment: Borrowers with credit scores of 580 and above are eligible for making the agency’s traditional minimum down payment of 3.5%. If you’re short on cash, taking time to improve your credit scores can make the difference between qualifying for an FHA loan or not.
  • Mortgage lenders can impose higher credit scoring requirements: FHA lenders may and often do impose underwriting requirements stricter than FHA minimum requirements. You may find that mortgage lenders require higher minimum credit scores, typically 620 or more.
  • Reduced seller concessions: FHA has determined that excessive seller concessions lead to higher mortgage loan default rates, and is slashing allowable concessions from 6 percent to 3 percent. This means that you cannot expect sellers to cover all closing costs, make needed repairs, and cover your appraisal and inspection costs. Sellers paying buyer costs contributes to inflated sale prices, which can cause mortgage defaults. Critics of FHA’s low down payment requirement suggest that borrowers who have more “skin in the game,” meaning money invested up front, are a better credit risk than those depending on others to cover their closing costs and down payment.

FHA Guidelines: Mixed Messages?

Borrowers and sellers would benefit if FHA would align its lending requirements for achieving uniform application of FHA guidelines and requirements. Two examples come to mind; if FHA allows a minimum credit score of 580 for borrowers to qualify for a 3. 5 percent down payment, its approved lenders should not be allowed to arbitrarily increase this minimum. FHA should work with lenders to establish uniform minimum credit scores. doing otherwise opens the gates for disgruntled applicants to allege discrimination or other unfair treatment, especially if the lender down the street is offering FHA loans with lower credit score requirements.

The proposed policy reducing seller contributions to borrower costs makes sense, but only up to the point where FHA continues to allow borrowers to make down payments sourced by cash gifts from friends and family. What about having more skin in that game?

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