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FHA Guidelines Tightening

DTIs, LTVs and credit scores impacted

Jan. 30, 2013

By Mortgage Daily staff


As the Federal Housing Administration works to improve the health of its Mutual Mortgage Insurance Fund, several changes are being made to FHA underwriting guidelines. Loans with credit scores less than 620 and jumbo mortgages are impacted, as are advertisements to borrowers with prior foreclosures.

FHA's annual report to Congress indicated that its capital reserve ratio had fallen to a negative 1.44 percent with a negative economic value of $16.3 billion.

Carol J. Galante, who was confirmed as Federal Housing Commissioner in December, reassured Sen. Bob Corker (R-Tenn.) in a letter just ahead of her confirmation that FHA was taking steps to bolster capital. Among the steps were changes to credit score requirements, maximum debt-to-income ratios and loan-to-value ratios.

Several steps highlighted Wednesday by FHA are expected to be formally announced in the coming days.

Applications on borrowers whose credit scores aren't at least 620 and DTI ratios are higher than 43 percent will require manual underwriting. Lenders will need to document compensating factors.

On loans for more than $625,500, down payments are likely to change. FHA is publishing a Federal Register Notice in the next several days that will propose to increase down payments on jumbo loans to 5.0 percent from 3.5 percent.

While FHA requires that at least three years has elapsed since a foreclosure and good credit has been re-established before the borrower's loan can be FHA-insured -- some lenders are accused of "inappropriately advertising and soliciting borrowers with the false pretense that they can somehow 'automatically' qualify for an FHA-insured mortgage three years after their foreclosure."

Enforcement efforts are escalating against FHA mortgagees that aggressively market to borrowers with previous foreclosures. FHA said it will also work with other federal agencies to address such false advertising by non-FHA-approved entities.

"These are essential and appropriate measures to manage and protect FHA's single-family insurance programs," Galante said in today's statement. "In addition to protecting the MMI Fund, these changes will encourage the return of private capital to the housing market, and make sure FHA remains a vital source of affordable and sustainable mortgage financing for future generations of American homebuyers."

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