The Federal Housing Administration (FHA) has been hit pretty hard by the foreclosure crisis. The agency, which insures 30 percent of new loans in the U.S. against default, has suffered heavy losses due to a high rate of foreclosures. More than 18 percent of FHA loans are at least delinquent by 30 days. That's more than the national average of 14 percent. The foreclosure crisis has even caused the FHA's reserve to fall below the limits required by Congress. To combat the ill effects of the foreclosure crisis, the FHA is planning to implement new rules.
Under the changes, homebuyers will:
-Pay an upfront mortgage insurance premium of 2.25 percent of the total loan amount, up from the current level of 1.75 percent. A borrower taking out a $200,000 mortgage would pay a $4,500 fee, for example, rather than the current fee of $3,500. Borrowers will still be able to wrap these fees into the total amount borrowed. FHA officials also plan to ask Congress to increase the maximum annual premium that FHA can charge.
-Need a credit score of at least 580 to qualify. Many FHA lenders already require a higher score, but there had been no standard requirement across the program. Borrowers with a score lower than 580 will need a down payment of at least 10 percent.
It looks like taking out an FHA mortgage is going to become a lot more expensive. And as suspected, the foreclosure crisis is having far reaching consequences for homebuyers who haven't even entered the marketplace yet. While it is commendable that the FHA recognizes the necessity of combating the foreclosure crisis, it may be more prudent to find and ban unscrupulous lenders who fraudulently place homebuyers into inappropriate mortgages.