Buying a Home | Financing | Government Programs | LendingTree
Potential New FHA Rules and Guidelines
By Craig Grella
The Federal Housing Administration (FHA) is already the largest mortgage insurer in the country, and they are being asked to insure more and more loans each day. To accommodate the influx of mortgage loan applications, the U.S. House of Representatives passed the conference report for H.R. 3288, the Consolidated Appropriations Act, allocating over $100 million for FHA to upgrade its technology and fraud detection programs.
Fraud perpetrated against lenders costs billions of dollars each year which, unfortunately, gets passed on to borrowers in the form of higher loan fees. The hope with the passage of HR 3288 is that lenders can detect fraud earlier, reduce fraud related losses, and make loans more affordable for its borrowers.
At the same time, the FHA is proposing new rules to strengthen risk management, boost lender oversight, and tighten controls for lender approval. Among them are a proposed change that would require FHA approved lenders to have higher net worth and reserve requirements and that they be liable for the loans they originate. According to HUD Secretary Shaun Donovan, the changes will expand enforcement for new loans, including “requiring lenders to indemnify the FHA fund for their own failures to meet FHA requirements, and holding lenders accountable nationally for any improper activities.”
Not all the changes are aimed at lenders, though. The FHA is also proposing changes that could affect borrowers and their eligibility to obtain an FHA insured loan from its approved lenders. The proposed changes include:
- higher insurance requirements
- larger down payments
- lower seller concessions
- minimum credit score requirements
Currently, the FHA insured loan program does not have a minimum credit rule, and the down payment requirement is only 3.5 percent. Should the FHA choose to raise the down payment requirement to 5%, it could potentially require borrowers to put an additional $1,500 down on each $100,000 borrowed. That amount could increase if lenders use FICO scores to categorize borrowers in different risk levels that would require additional down payments based on FICO. This method is similar to underwriting procedures banks employ in conventional conforming loans.
At face value, these changes would appear to make FHA loans less available or restrict the amount of homeowners that can benefit from the program. However, the new rules will likely create a more secure pool of mortgages, help to stabilize an ailing real estate market, and reduce further loan related losses. All of this could potentially allow lenders to pass on lower cost mortgages to the borrower.
