FHA will tighten credit standards

Although the Federal Housing Administration (FHA) has confirmed that as of Sept. 30 it will fall short of its legal requirement to maintain supplementary reserves of 2 percent of the loans it insures, FHA Commissioner David Stevens says that it will not be seeking a taxpayer bailout.

Instead, to help mitigate losses, the FHA will tighten credit standards to rebuild the cushion to 2 percent or more, without raising the premiums borrowers pay or seeking an increase in its down-payment requirement of 3.5 percent.

Under the new rules, lenders making FHA-insured loans would need to show net worth of at least $1 million, an increase from $250,000.  The agency is seeking to ensure that lenders have funds available to compensate the FHA if their loans fail to meet quality standards.

The FHA also will impose a maximum loan value of 125 percent of the current estimated home value on refinanced loans, in line with Fannie Mae and Freddie Mac.

Appraisals will be valid for no more than four months, a decrease from the previous six to 12 months validation period.  The FHA also plans to implement appraisal changes adopted earlier this year by Fannie and Freddie.  Mortgage brokers or bank employees paid on commission won’t be allowed to order appraisers.

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