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FHA announced plans to increase minimum down payments for borrowers with FICO credit scores below 580, and the agency also plans to raise mortgage insurance premiums. Here's what you should know.

FHA Changing Home Loan Requirements

If you're planning to buy a home or refinance your mortgage with an FHA loan, you may wish to complete your purchase or refinance loan sooner than later. FHA, which insures mortgage lenders against losses on home mortgage loans, is tightening its lending requirements and changing down payment requirements for borrowers with credit scores below 580. Here are highlights of changes planned for mid-2010:

  • Minimum down payments for borrowers with FICO credit scores of less than 580 will increase to at least 10% from the current 3.5%. Borrowers with credit scores of 580 or more remain eligible for 3.5% minimum down payments.
  • Up front mortgage insurance premiums (UFMIP) will increase to 2.25% from 1.75%. In many cases this increase will not increase borrowers' initial cash outlay as UFMIP amounts are typically rolled into the mortgage amount.
  • FHA is planning to ask Congress to raise the cap for annual mortgage insurance premiums; their plan is to transfer some of the UFMIP to annual mortgage insurance premiums, which is intended to further limit funds needed at closing a new home loan or refinance mortgage.
  • FHA is decreasing allowable seller contributions to buyer costs from 6% to 3%. This brings FHA policy into line with conventional mortgage financing. This reduction means that sellers will not be allowed to pay more than 3% of allowable buyer closing costs.

Borrowers with less than 20% down or who have credit challenges typically rely on FHA-insured mortgages. As of September 30, 2009, FHA insured nearly 30% of US mortgage loans valued at approximately $360 billion. FHA continues to provide home financing to moderate income borrowers while striking a balance between reducing its risk exposure and providing affordable mortgage loans. Although no exact date for these policy changes has been announced, FHA plans to implement them by early summer.

Karen Lawson
Karen Lawson is a freelance writer with extensive experience in mortgage banking and home loan loss mitigation programs. She holds BA and MA degrees in English from the University of Nevada, Reno.