FHA Changes Credit Score and Down Payment Rules

The Federal Housing Administration (FHA) announced new rules on Wednesday that will make it harder and more expensive for first time homebuyers to get an FHA backed loan. Some potential buyers will be priced out of the market altogether.

The new rules are designed to help the agency reduce the number of foreclosures by preventing homeowners from getting loans they can’t afford. The rules also protect potential homeowners in the same way.

From the Chicago Tribune

“Homeownership is important to the sustainability of communities,” FHA Commissioner David Stevens said in a conference call with reporters. “But we’ve also learned that not everybody should own a home. Putting responsible guidelines in place is a way to insure sustainability for homeowners.”

To be able to make a down payment of just 3.5 percent on an FHA-insured loan, homebuyers would have to have a minimum FICO credit score of 580, rather than the current 500 FICO outlined in FHA guidelines. New borrowers with less than a 580 score would have to put down 10 percent on a home purchase.

However, that change is unlikely to affect many homebuyers because most participating lenders require borrowers to have a score of 620 or higher. Some legislators had called for all FHA-backed mortgages to require a 10 percent down payment.

The FHA also will increase the upfront mortgage insurance premium to 2.25 percent of the total loan amount, from 1.75 percent. The agency also will ask Congress for permission to boost the maximum annual mortgage insurance premium it can charge. If that authority is granted, some of the premium increase would be shifted from the upfront premium to an annual one.

As disclosed last month, the FHA also said that sellers would be able to pay closing costs of up to only 3 percent of a home’s sales price, rather than the current 6 percent.

The increased upfront mortgage-insurance requirement will take effect in the spring. The new FICO score requirement and the change in seller-contributed closing costs will take effect in early summer, the agency said.

Getting an FHA backed loan was never a straight forward proposition anyway. If you think you qualify and you’re looking to buy a home in Pleasanton, Dublin, San Ramon, Danville or anywhere in the Tri-Valley, give me a call and I’ll help you through the process.