If you’ve been looking forward to taking advantage of a government-backed mortgage through the Federal Housing Administration – and have bad credit – you may have a harder time getting financed. The agency announced on Wednesday its plans to make adjustments that will help strengthen its weakening finances, unfortunately, at the expense of bad-credit borrowers.
Federal Housing Administration Adjustments
According to recent reports, the Federal Housing Administration (FHA), which insured nearly a third of the new mortgages in 2009, will make several adjustments to its lending process in 2010, including:
- Increasing premiums: The FHA plans to increase the premium it charges for its mortgage insurance (which backs those who can’t afford to pay 20 percent of the loan as their down payment).
- Larger down payments: Those who have weaker credit scores will be required to come up with larger down payments for their homes.
- Reduced seller contributions: Many times, a seller can contribution to a buyer’s closing costs; however, the FHA plans to reduce the amount the seller can provide and require lenders to enforce this reduction.
Unfortunately, the FHA has suffered a lot of losses in the past year due to a growing number of defaults. As a result, it has decided to make the changes necessary to bring its reserve fund back above 2 percent of its insurance guarantees, which is mandated by Congress (currently, FHA’s fund sits at 0.53 percent).
What the Changes Mean to Underserved Communities
The FHA predicts that its adjustments won’t hurt borrowers much. In fact, the increase in mortgage insurance premiums is predicted to increase by around 0.5 percent. However, the credit score adjustments could have an effect on a lot of borrowers.
From now on, borrowers will be required to have a credit score of at least 580 to qualify for the 3.5% down payment program. Those with lower scores will have to pay at least 10 percent.
Unfortunately, many borrowers gave lower credit scores due to foreclosures, bankruptcies and other issues related to losing their jobs during the financial crisis. However, the FHA argues that the average credit score is still in the upper 600s.
If you were buying a home, could these FHA adjustments affect you?
