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FHA Proposes Additional Program Changes to Boost Capital Reserves

Federal Housing Administration (FHA) Commissioner David Stevens unveiled three specific policy changes to strengthen the FHA’s capital reserves last week.

In addition to earlier steps taken to manage its risks and to boost reserves, Stevens is proposing to update the combination of credit and down payment requirements for new borrowers; reduce seller concessions from six to three percent; and tighten underwriting standards for manually underwritten mortgage loans.

“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,” he said. “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.”

Each of the policy changes are designed to mitigate risk to the Mutual Mortgage Insurance Fund while promoting sustainable homeownership for FHA borrowers.

New borrowers seeking FHA insured financing with be required to have a minimum FICO score of 580 to qualify for FHA’s flagship 3.5 percent down payment program. Those with credit scores of less than a 580 will be required to make a down payment of at least 10 percent and borrowers with credit scores of less than 500 will no longer qualify for an FHA-insured mortgage.

HUD is also requesting to reduce the amount of seller concessions from six percent to three.  The agency said allowing sellers to contribute up to six percent of the home’s sales price to offset a buyer’s costs exposes the FHA to excess risk by potentially driving up the cost of the home beyond its appraised value.

It would also like to tighten underwriting standards for manually underwritten loans. When using compensating factors in the underwriting process, lenders will be required to consider those factors which are the best predictive indicators of loan performance, such as the borrower’s credit history, loan-to-value (LTV) percentage, debt-to income ratio, and cash reserves.

The policy changes will not impact the FHA’s reverse mortgage program (HECM).  HUD is seeking public comment for the next 30 days.

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