Due to the increase in mortgage defaults, the Federal Housing Administration (FHA) is about to change its lending criteria. As we all know, FHA is not directly involved in lending but it insures the lenders in case the borrowers default their mortgage dues. FHA has proposed changes regarding the insurance premiums, mortgage down payments etc. Just take a look:
Rise in mortgage insurance premium: The borrowers, who take up FHA sponsored loans, have to pay an insurance premium of 1.75% of the loan amount. This has to be paid upfront but can be rolled in the loan. FHA is planning to increase this premium to 2.25%. This is the second time in the last 2 years that the insurance premiums on FHA loans will be raised.
Changes in down payment requirements: Presently, the minimum down payment requirement for a FHA backed loan is 3.5%. This limit will remain the same but the borrowers who have a credit score less than 580 will have to make a down payment of 10%. It is true that FHA loans are not solely based on credit score, however, lenders prefer borrowers who have a score of 620.
Experts are of the opinion that FHA down payment requirement should be raised further. Some of them have proposed to increase the down payment from 3.5% to 5%.
Changes in sellers' aid to buyers closing cost: FHA is also planning to reduce the amount that sellers can offer as aid to the buyers for their closing cost. Earlier the sellers could offer 6% of the purchase price. As per the proposed changes, they would be able to contribute only 3% of the purchase price.
These new rules, if implemented, will make it tough for borrowers to qualify for a FHA loan. However, these rules are necessary in order to avoid another real estate crisis in the near future.