In the hopes to streamline FHA risks associated with the Mutual Mortgage Insurance Fund (also known as MMI), HUD has put out three possible changes to the lending process in the hopes of making home ownership more “sustainable”. Earlier in the year they proposed stepsto manage risk and boost reserves, now FHA is proposing to change credit and down payment requirements, reduce seller concessions, and tighten underwriting standards for manually underwritten mortgage loans.

Of course, what HUD thinks is good for them, is not always good news to buyers looking to utilize FHA financing here in Minneapolis and Saint Paul, so HUD has set up a 30 Day Comment Period, in which the public (and of course us Realtors) can voice our opinion on the proposed changes. The proposed changes are as follows:

  1. Update the combination of credit and down payment requirements for new borrowers. New borrowers seeking FHA-insured financing will be required to have a minimum FICO score of 580 to qualify for FHA’s flagship 3.5 percent down payment program. New borrowers with credit scores of less than a 580 will be required to make a cash investment of at least 10 percent. Borrowers with credit scores of less than 500 will no longer qualify for an FHA-insured mortgage.

My take:If you have a credit score of 500, you shouldn’t be buying a house. You have financial issues you need to solve before taking on the responsibility of a mortgage. The larger down payment requirement for those with a credit score of 580 is pretty reasonable in my opinion, so I don’t have  a problem with this proposal.

     2.   Reduce allowable seller concessions from six to three percent. Allowing sellers to contribute up to 6% of the home’s sales price to offset a buyer’s costs exposes the FHA to excess risk by potentially driving up the cost of the home beyond its appraised value. Reducing seller concessions to 3% will bring FHA into conformity with industry standards.

My take:I have a serious problem with this one. FHA is making an assumption that the purchase price will be driven up in order to compensate for the seller paying a buyer’s closing costs, stating this will go above the appraised price. Well, we all know in real estate that if a home doesn’t appraise for the purchase price, then the loan cannot be closed on, and most likely both parties will have to renegotiate the contract to meet the appraised value. Also, many sellers just pay the closing costs as part of the deal, and don’t bump the purchase price simply for the reason that the buyer cannot afford it. Since appraisers have even stricter guidelines to follow, most appraiser will not be fudging numbers to make a deal work. So FHA is making a poor argument for slashing allowed seller concessions, and hurting buyers in the process. Seeing as FHA is the go-to financing options in today’s housing market, I think this proposal will only slow down the housing recovery.

     3.  Tighten underwriting standards for manually underwritten loans. When using compensating factors in the underwriting process, lenders will be required to consider those factors which are the best predictive indicators of loan performance, such as the borrower’s credit history, loan-to-value (LTV) percentage, debt-to income ratio, and cash reserves.

My take: Kinda vague. Who really knows what standards need tightening….standards from my understanding are pretty tight right now in regards to “compensating factors”, so how far will this really go. HUD needs to clarify this one a little better.

Twin Cities residents, even if you are not currently buying a home, nor plan on using FHA financing, should still take the time to let their voice be heard. Please click on the “Submit a Comment” link on the right hand side of the HUD webpage found HERE, to voice your opinion.

What are your thoughts on the proposed changes?

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