In the midst of an already dire housing market, the federal government plans to impose more stringent requirements for those seeking a Federal Housing Authority-backed mortgage.
Among the changes slated for FHA loans is a higher down payment requirement for borrowers with poor credit – those with a credit score below 580. Other changes include a hike in insurance fees that borrowers must pay, and a cap on the amount of cash that sellers can contribute for closing costs.
“Striking the right balance between managing the FHA’s risk, continuing to provide access to underserved communities, and supporting the nation’s economic recovery is critically important,” said FHA Commissioner David Stevens in a statement. “Importantly, FHA will remain the largest source of home purchase financing for underserved communities.”
Beginning this summer, borrowers with credit scores below 580 will be required to put down a minimum of 10%. For borrowers above that credit score, the down payment requirement will remain 3.5%.
The amount that a seller can contribute to closing costs will drop to 3% from 6%, while the premium for mortgage insurance will jump to 2.25% from 1.75%.
The requirements are meant to stem the rising number of defaults seen in the past year as the popularity of FHA loans has skyrocketed. In November, the agency reported its reserve fund had dropped to 0.53% of its guarantees, far below the 2% required by Congress.
Earlier Wednesday, the government said housing starts unexpectedly fell in December, hit by a drop in construction activity for single-family dwellings. Shares of homebuilders, including Toll Brothers (TOL), Hovnanian (HOV) and KB Home (KBH), are generally weaker along with the broader stock market.
FHA is changing the game for riskier borrowers. Makes sense to me!