FHA mortgages may soon cost borrowers more money and become harder to qualify.
Ever since the market for mortgage-backed securities dried up, FHA mortgage loans have become a popular financing source for borrowers because of lower costs and easier qualifying. FHA mortgage volume has increased from a market share of 3% to 30% of all residential purchase loans and more than 20% of refinance mortgages.
However, a slow job market is causing more loan defaults and depleting FHA’s capital cash reserves, which fell far below the mandated level to cover potential losses. Now, the agency is looking for ways to reduce risk and increase reserves, which may include raising the minimum down payment, credit scores, insurance premiums, and reducing closing cost contributions from home sellers.
Larger Down Payments - Their may be a requirement that borrowers have more equity in a loan transaction to discourage missing payments or risking foreclosure. An FHA loan currently has a minimum down payment of 3.5%, which may increase to at least 5%.
Better Credit Scores - An FHA mortgage offers the most lenient and flexible credit guidelines compared to Fannie Mae and Freddie Mac. Critics say this generous underwriting policy has contributed to increased loan defaults and foreclosures, which could lead FHA to impose credit score minimums.
Higher Insurance Costs - FHA mortgages have an up-front insurance premium, which is usually added onto the financed loan amount, plus an annual premium, paid in monthly installments. In order to rebuild capital reserves, FHA could decide to raise these fees to the maximum allowed by congressional limits.
Less Seller Contributions - One of the benefits of an FHA mortgage is the allowance of home seller contributions to the borrower’s closing costs. The current policy limit allows a maximum of 6% of the purchase price, which critics believe to be excessive. They believe less contributions would reduce defaults by requiring more money from borrowers.
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