Refinance Mortgage Home Loans Refi

It's going to be more difficult and more expensive to get an FHA-insured loan soon. That's the message that the housing secretary delivered to Congress this week.

Lately, about one in four new mortgages are insured by the Federal Housing Administration. FHA-insured mortgages have a distinct appeal: They require down payments (or equity) of as little as 3.5 percent. Because of foreclosures, the FHA has been paying more in mortgage insurance claims than it has been collecting in premiums. So the agency plans to make it harder and more expensive to get an FHA-insured loan.

Shaun Donovan, secretary of Housing and Urban Development, told the House Financial Services Committee that the FHA is considering several options:

* Increase the minimum down payment.
* Raise the insurance premiums that borrowers pay.
* Raise minimum credit scores to qualify for FHA insurance.
* Make buyers pay more of their own closing costs.

To qualify for an FHA-insured mortgage, a homebuyer has to make a down payment of at least 3.5 percent. A refinancer has to have equity of at least 3.5 percent of the appraised value. The 3.5 percent requirement was instituted at the beginning of this year; previously, the minimum was 3 percent. Now HUD is thinking about raising it again, for the same reason it did at the beginning of 2009: "to make sure that FHA borrowers have more skin in the game and a stronger equity position in their loans," as Donovan explained to the House panel.

This fall, a bill was introduced into the House that would raise the minimum FHA down payment to 5 percent. The Republican proposal met an icy reception from Democratic leaders. That's a reversal from the situation in spring 2007, when the Bush administration asked Congress to allow the FHA to insure no-down payment loans. Democrats balked at that proposal, too.
FHA managing risk
When a borrower gets FHA insurance, the policy is paid for in two pieces. First, there's an upfront premium of 1.75 percent, which is paid in a lump sum at closing. On a $100,000 loan, that would be $1,750, which can be rolled into the loan amount.

Then there's the annual premium of 0.5 percent or 0.55 percent of the loan amount, depending on the size of the down payment. This premium is paid monthly. On a $100,000 loan, it would amount $41.67 or $45.83 a month. Donovan said he wants Congress to give the FHA the authority to raise that annual premium for riskier borrowers.

The FHA requires a minimum credit score of 500 to qualify for its mortgage insurance. That doesn't matter much, because most lenders do have minimum credit scores for FHA-insured loans. A few lenders have a minimum credit score of 640 for FHA-insured loans; most have a minimum score of 620, and a few will approve FHA-insured loans with scores below that.

Now the FHA plans to require higher minimum credit scores to protect itself from the riskiest borrowers. Donovan hinted that this change might be temporary. In written testimony before Congress, he didn't specify what the minimum credit scores will be. He said FHA might require higher credit scores on lower down payments.

Finally, HUD wants FHA borrowers to take more responsibility for their own closing costs. Right now, the rules allow homesellers to pay closing costs equal to 6 percent of the home's price. The practice reduces the homebuyer's out-of-pocket costs. But it also "exposes the FHA to excess risk" by artificially inflating house prices, Donovan says. That's because sellers tend to hold firm to their asking prices, instead of negotiating lower prices, when they're going to pay the seller's closing costs.

Instead of allowing sellers to pay closing costs equal to 6 percent of the sale price, Donovan wants to cut that maximum to 3 percent. This would have an effect similar to that of requiring bigger down payments: Homebuyers would place more of their money at risk, and less of the FHA's money at risk.