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FHA May Require 10% Down from Low Credit-Score Borrowers

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The Federal Housing Administration (FHA) is considering three policy changes to boost its capital reserves. Under the changes, new borrowers seeking FHA-insured loans will need a minimum FICO score of 580 to qualify for FHA's 3.5% downpayment program. New borrowers with credit scores between 500 and 580 will be required to provide a 10% downpayment, and borrowers with credit scores below 500 will no longer qualify. The US Department of Housing and Urban Development (HUD) published a notice today seeking public comment on the measures, which are designed to reduce financial risk and preserve affordable mortgage finance. HUD will accept public comment for the next 30 days on the proposed changes. "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 FHA commissioner David Stevens in a press release. "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." Specifically, the FHA is proposing to update the combination of credit and downpayment requirements for new borrowers, reduce seller concessions from 6% to 3% and tighten underwriting standards for manually-underwritten loans. The changes also seek to reduce the share of the home sales price that sellers are allowed to contribute at the closing table to offset the buyers' costs. The current share of 6% "exposes the FHA to excess risk by potentially driving up the cost of the home beyond its appraised value," the FHA said in a statement today. The proposed change would reduce seller concessions to 3%, which the FHA said would bring it into conformity with industry standards. The proposed FHA policy updates also require lenders, during the underwriting process, to consider compensating factors that are "the best predictive indicators of loan performance" -- credit history, loan-to-value ratio, debt-to-income ratio and cash reserves. Write to Diana Golobay.

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