Are tightening FHA Underwriting Guidelines going to make it harder to buy?

FHA is experiencing a whole new set of challenges as the number of Governement Insured loans rises from only 3% in 2006 to almost 30% of purchases and 20% of refinances in today’s market.

It’s been reported for a couple of months now that FHA’s reserves have dipped below the two percent level, to 0.53 percent of total insurance-in-force resulting in talks about a Government bail out for FHA

These rumors have been refuted by FHA Commissioner David Stevens. Commissioner Stevens states that FHA will be looking for new ways to reduce risk which include tightening underwriting guidelines and more lender scrutiny in regards to loan qualify and compliance with FHA policies.

Lend America, the Nations 22nd largest FHA lender found this out on Tuesday, December 1st 2009, when the Lender closed it’s doors as a result of FHA revoking its approval to originate government-backed loans.

CNBC Real Estate Correspondent Diana Olick has a post today about FHA’s plan to battle challenges that have resulted from the lending market of the past couple of years.

Those steps will include raising minimum borrower FICO scores, possibly requiring larger downpayments, and reducing the maximum permissible seller concession from six percent currently to three percent.

It could also include raising annual insurance premiums, which would require Congressional authority. This is according to the testimony HUD Secretary Shaun Donovan is scheduled to present to the House Financial Services Committee on Wednesday afternoon, obtained by CNBC.

So, what does this mean to you? There are a couple of potential challenges to be aware of as a home buyer or home owner looking to use an FHA insured loan.

First, and the most obvious impact will be if FHA increases the minimum credit score requirement (or lifts the risk based pricing suspension), increases down payment requirements and mortgage insurance premiums or reduces the allowed seller paid closing cost contribution from 6% to 3%.

These moves will make an immediate impact on buyers trying to qualify for the purchase of a new home.

The less obvious backlash will be that lenders will begin to become more and more strict about qualifying borrowers for fear of increased scrutiny from FHA. The result of poor quality by a Lender could result in losing the ability to offer Government Insured loans.

As always, we’ll keep you posted as more news comes out about this.

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