FHA to tighten lending requirements

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The Federal Housing Administration (FHA) is set to increase the borrowing requirements for home buyers. While not entirely unexpected, this is clearly a move that could have serious implications for the fragile housing market’s recovery.

Steps that are being considered include greater down payment requirements and higher credit scores for consumers looking to finance their home purchase with an FHA-backed mortgages.

Specific details have not been released, but the steps are expected as a means of limiting risks to the FHA’s loan portfolio. Housing and Urban Development (HUD) Secretary Shaun Donovan wants FHA borrowers to have more ’skin in the game’ and a stronger equity position in their loans.

FHA borrowers currently are only required to have 3.5% cash for a down payment. HUD has the authority to increase the minimum down payments. They don’t have the authority to raise the annual mortgage insurance premiums, but may see permission from Congress.

Additionally, it is expected that sellers will only be able to help buyers with 3% of their closing costs, rather than the current 6% allowed.

The moves affecting home buyers are part of a three-tier plan by the FHA to lessen risks to its portfolio. The agency also plans to take steps to increase FHA capital and to hold lenders more accountable for the quality of loans they write.

These changes are needed as FHA has become a popular direction for first-time homebuyers in particular. FHA loans ahve accounted for almost 30% of home purchases—more than 75% of which are to first-time home buyers. Just three years ago, the FHA’s share of the mortgage market was 3%.

With FHA loans having become so popular, tighter lending requirements will have a significant impact on the housing recovery.