Qualifying for Loans May Get Harder

If you are in the market to purchase property and are counting on getting an FHA-insured loan, you may want to act quickly.

First, a quick explanation: the FHA, or Federal Housing Administration, is not a lender, but instead insures loans that are written under its guidelines, thus protecting lenders against losses on those loans. If the borrower defaults on the loan the lender can seek recourse from the agency. A huge benefit of an FHA insured loan is the low down payment, which can be as low as 3%. The agency insures a large percentage of loans written by lenders in the U.S.

The FHA is about to enforce new underwriting guidelines and fee increases in order to combat falling reserves and rising losses that have affected the FHA. There are four categories of changes that are to be implemented:

1. Raising Annual Insurance Premiums for Borrowers. The bottom line is that borrowers will have to pay higher insurance premiums as part of their borrowing costs. An upfront insurance premium payment will be raised, as will the percentage of annual premiums depending on the amount of the down payment.

2. Buyer Credit Score “Floor.” The lower the down payment, the higher the credit score will need to be. Exact amounts are not yet determined. Currently most lenders require a minimum credit score of 620 for FHA borrowers, but this may change if the down payment is low.

3. Increase in Buyer Down Payments. Sellers will be restricted on the amount of money they can put toward the buyer’s closing costs. This number will drop from the currently allowed 6% to just 3% of the home price. Down payment increases are also being considered, which could price many FHA buyers out of the market.

4. Higher Accountability for FHA Lenders. FHA approved lenders will be held to much higher standards for loans they submit to the FHA. There are no details as of yet on this one.

The problem with the above changes is that if the economy continues to worsen it may not actually be beneficial to the FHA. The result could facilitate the necessity to utilize a tax payer bail out of the agency, something that I assume the majority of people will oppose. This won’t likely happen right away but could be a problem in the years ahead. Either way, THE FEDERAL GOVERNMENT NEEDS TO IMPLEMENT MORE DRASTIC MEASURES TO PREVENT THESE PROBLEMS.

This newest real estate fallout could make it much harder for people to obtain loans, especially those with small down payments–what is viewed as an acceptable down payment today may not be in the future.