FHA Plans to Raise Downpayment Requirements for FHA-Backed Mortgages

February 15th, 2010

The Federal Housing Administration is considering stricter requirements for the loans it guarantees, which means it could get tougher to get FHA home loans. Higher down payment and credit score requirements are in store for FHA loans.

If you’re thinking about buying or refinancing a home through an FHA-guaranteed mortgage, it’s a good idea to keep on top of the possible changes so you’re prepared to meet the new rules.

FHA Loans: Growing Role in Housing Market

FHA home loans are a popular option for first-time buyers because they require only 3.5% down payments. They’ve been a good option as well for buyers with less-than-perfect credit. Since the mortgage crisis began, FHA has played a growing role in the housing market. It now insures 30% of mortgages for home purchases and 20% of mortgages for refinancing. Three years ago, the FHA insured only 3% of mortgages.

But concerns have grown about the risks of FHA’s portfolio, and that it could be laying the groundwork for yet another foreclosure crisis. Now officials are looking for ways to reduce risk. Housing and Urban Development Secretary Shaun Donovan told the U.S. House Committee on Financial Services that the FHA would increase the amount of cash that buyers have to bring to the table to purchase a home.

FHA Mortgage Prequalification To Get Tighter

More details will be released in coming months, but here are some of the changes considered:

• Higher credit scores will be required for borrowers seeking FHA-insured mortgages.

• The FHA mortgage insurance premium could go up.

• The amount of closing costs with which sellers can help buyers could shrink to 3% from the current 6%.

• The 3.5% down payment requirement will increase.

No one knows yet how much the minimum down payment requirement will increase. Some federal lawmakers are calling for at least a 5% down payment rule. And Secretary Donovan hasn’t released any specifics about credit score requirements, although they could be tied to the amount of down payment.

Use Free Mortgage Calculators

So what does this mean to you if you’re thinking about seeking an FHA loan? Use free mortgage calculators to help you plan. Don’t count on putting only 3.5% down. Boost your savings to shoot for the highest down payment possible. A savings mortgage calculator determines how much you’ll save by a set date, given your deposit amount, interest rate and time. The prequalification mortgage calculator shows how lenders see you. See how much you can afford based on yearly income, debts and other factors.

Although the changes haven’t been made yet, you’ll be better off if you start preparing now for tighter requirements.

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