Loss Mitigation and Lending Under the FHA Rule Change

The Federal Housing Administration (FHA) made significant rule changes last week that can affect its current and future mortgage borrowers, as well as those seeking loss mitigation assistance from FHA-backed lenders. The changes involve an overall tightening of its lending standards, as the agency met a serious crunch as a result of the recession and housing crisis.

Higher cash-downs
The most significant change is the increase in the mortgage insurance premium to be paid upfront. Where borrowers previously paid 1.75% of the loan amount as the one-time premium, they now have to put down 2.25%. However, the option to pay insurance in monthly premiums is still open. The FHA is also proposing an increase in the cap for annual premiums, which is currently 0.55% of the loan amount.

Minimum credit scores
Previously, any borrower could get an FHA mortgage with only a 3.5% down payment. Under the new rules, however, borrowers would need a credit score of at least 580 to get these terms. Otherwise, the minimum down payment will be set at 10%. For homeowners currently receiving loss mitigation help, such as loan modification, this can affect their chances of getting home financing in the future.

Stricter terms
Homeowners who qualify under these new terms will also have to deal with tighter lending terms. Lenders may impose tighter penalties on missed payments and raise their standards for approving potential borrowers. Loss mitigation options may also be limited for people with poor credit to start with, and common solutions such as loan modification may be harder to obtain except under the government program.

Seller assistance
The limit for seller concessions—a form of financial assistance extended by sellers to their buyers—will be reduced to 3% from a previous 6%. This can be in the form of shared closing costs or upgrades to the property. The practice, which helps homeowners sell their homes without lowering their price, puts the FHA at greater risk by effectively inflating the home’s appraised value, according to Stevens.

Lender monitoring
The FHA will also put a closer watch on lenders, particularly the “outlier” companies that originated the sub-prime loans that put the industry under water. Stevens said he is focused on finding and stopping these lenders through intense monitoring procedures, including the online reporting of lender performance rankings. He has also urged Congress to take action against lenders whose loans do not meet FHA guidelines.