The Federal Housing Administration is raising insurance rates and tightening credit-score rules to combat a rise in delinquencies. The FHA doesn’t make loans, but rather offers insurance against default. Many borrowers are willing to pay for the insurance since they only require a down payment of 3.5% of the purchase price of a home. Currently, the FHA insures about 30% of new loans, and is the largest backer of first time home buyers.
Under the changes, homebuyers will:
- Pay an upfront mortgage insurance premium of 2.25% of the total loan amount, up from the current level of 1.75%. A borrower taking out a $200,000 mortgage would pay a $4,500 fee, for example, rather than the current fee of $3,500. Borrowers will still be able to wrap these fees into the total amount borrowed. FHA officials also plan to ask Congress to increase the maximum annual premium that FHA can charge.
- Need a credit score of at least 580 to qualify. Many FHA lenders already require a higher score, but there had been no standard requirement across the program. Borrowers with a score lower than 580 will need a down payment of at least 10%.
Also, the FHA is cutting the amount of aid sellers can contribute to homebuyers’ closing cost to 3% from 6% of the purchase price. The FHA said the higher 6% concession led to inflated purchase prices. The changes are set to go into effect in the first half of the year.
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