Higher Upfront Costs for FHA Loans Possible

Published: Wed 16 Dec 2009

Perry Begay

Americans who want the Federal Home Administration to back their next mortgage should be prepared to pay more for their share in the transaction. The intent by the FHA is to make borrowers think twice before allowing their mortgages to default as has happened repeatedly during the housing crisis because more of their own money would be tied up in their homes.

Policy changes at FHA are expected to be presented to Congress on Wednesday by Housing and Urban Development Secretary Shaun Donovan. The reason is the agency's reserves have fallen to 0.53 percent of all single-family-home loans it insures, well below the mandated 2 percent.

Donovan is expected to testify before the House committee that the rocketing number of loans FHA has agreed to back in recent years indicates tighter safeguards against risk must be put into place. The agency's loan portfolio currently is about 30 percent for home purchases and 20 percent for refinancing.

A major change would be FHA's requiring higher down payments on homes. Currently, a minimum of 3.5 percent is mandated, which critics contend is too low. Agency officials have not developed a new percentage.

There also would be a limit on the amount of seller concessions such as closing costs and free upgrades. Currently, they can be as high as 6 percent of the home value. Although FHA has not indicated what the number would be, Donovan said the maximum should be 3 percent, which is the usual cap in the regular lending industry.

Other considerations include hiking the amount for insurance premiums that borrowers pay monthly. That amount is on top of the premium of 1.75 percent of the loan value that is charged when the loan is granted. That premium also may increase.

As a hedge against borrowers that pose the biggest risks, FHA temporarily would increase the minimum credit score that each new borrower would need to have. The agency is still considering what the level should be. The minimum currently is 500 out of a possible 850, which is far below what is even considered a "poor" rating. There is some worry that applicants considered extreme credit risks by reputable mortgage lenders would still be able to get the loans from others who are deceptive.

Most of the new initiatives would not require any approval by Congress.

The FHA is credited with keeping the housing market alive by insuring loans against default when the rest of the mortgage market nearly imploded. That seems to be taking its toll as an audit to gauge the agency's financial health revealed reserves required to handle unexpected losses were about $3.6 billion on Sept. 30. That's a huge fall from the $12.9 billion in reserves a year earlier.