FHA announces tightened lending standards

Mortgages backed by the Federal Housing Administration are about to get more difficult to secure. The agency announced yesterday that it will raise insurance rate premiums to 2.25 percent — the legal maximum — from 1.75 percent this year, and will begin requiring borrowers with credit scores below 580 to make down payments of 10 percent or more. Previously, 10 percent down payments were only required of borrowers with credit scores below 500, while most others received loans with 3.5 percent down payments. Sellers will also be allowed to contribute 3 percent of the purchase price to buyers’ closing costs, down from the 6 percent figure that had previously been allowed. The FHA backs nearly one-third of U.S. home loans and is struggling with a 14 percent delinquency rate. The FHA’s revisions are intended to scale back the burden of those delinquencies on taxpayers, but not so much as to hinder the beginnings of a housing market recovery. “Striking the right balance between managing the FHA’s risk, continuing to provide access to underserved communities and supporting the nation’s economic recovery is critically important,” said FHA Commissioner David Stevens. [Bloomberg]