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By Chris Raborn | Broker in Baltimore, MD

FHA to tighten underwriting, raise premiums

The Federal Housing Administration will issue a series of changes to FHA mortgage programs this week designed to bolster the agency's capital reserves in the hopes of avoiding a taxpayer bailout.

The changes will limit the ability of some borrowers with low credit scores to qualify for loans, and raise minimum down payment requirements and premiums for borrowers taking out mortgages larger than $625,500.

Key points:

  • FHA will raise the annual mortgage insurance premium paid by borrowers on most new FHA loans, which the FHA expects will add $13 a month to the average borrower's monthly payments.
  • FHA will reverse a policy that automatically canceled required premium payments after loans reached 78 percent of their original value. Most FHA borrowers will now have to continue paying annual premiums based on the unpaid principal balance for the life of their mortgage loan.

    Borrowers with FICO credit scores below 620 and a total debt-to-income ratio of more than 43 percent will not be eligible for processing through FHA's automated underwriting system, TOTAL Scorecard. Such will have to be processed manually, with lenders documenting compensating factors such as a larger down payment or a higher level of reserves.

    FHA will crack down on lenders that advertise under the false pretense that borrowers can "automatically" qualify for an FHA-insured loan three years after a foreclosure. Borrowers who have experienced a foreclosure must have re-established good credit and meet underwriting criteria, including the policy change outlined above for borrowers with credit scores under 620.

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    By Trevor Curran,  Tue Feb 5 2013, 10:11
    Thanks, Chris, for highlighting these important developments with FHA loans. I'm happy that HUD is keeping a "look out" for solid, sensible, FHA lending. Too many people consider FHA loans as a dumping ground for marginally qualified borrowers. FHA is in fact a pathway to homeownership in the sense that the Underwriting criteria are designed to help renters become homeowners. The program is NOT designed to bring potentially "toxic" borrowers into the homeownership realm.
    Trevor Curran
    NMLS #40140

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