FHA Changes Underwriting / Approval Guidelines

1. The Upfront MIP has increased from 1.75% to 2.25%. There may also be an increase applied to the buyer's monthy MIP in the near future. These changes should take affect in the Spring 2010 but the actual date has not been announced.
   
2. Borrowers will be required to have a minimum credit score of 58o to qualify for FHA's minimum down payment of 3.5%. Borrowers with credit scores below 580 will need a 10% down payment. Expected implementation will be early summer.
   
3. Seller concessions towards buyer's closing cost and prepaid items has been reduced from a maximum of 6% of sales price to 3%. Expected implementation will be early summer.
   
4. Increased legislative authority to hold delegated underwriting lenders liable for indemnification of loan losses suffered by FHA through lender underwriting errors, omissions or fraud.

Conclusions

These changes were expected given recent comments from the head of FHA and congessional hearings on the FHA Insurance Reserve. The greatest impact will probably come from the reduction of the seller allowed contributions to buyer closing costs. Changes to the minimum credit score criteria will have little impact because most lenders had already gone to a minimum score of 620. With FHA's public statements to hold Direct Endorsement Lenders responsible for defaults, expect lender underwriting requirements to continue to tighten. The bottom line, lenders don't like buying loans back which is what FHA might force them to do by not honoring the FHA mortgage insurance if fault is found with the lenders in their approval process. Stay tuned in for future develpments with John Shellington