Moving to head off the financial impact of defaulting borrowers, the FHA is adding more-stringent lending requirements and higher fees borrowers must pay to get the federally-insured loans.
The FHA is more exposed to defaults than ever. By some estimates, as much as 50 percent of all purchase loans in some areas are FHA insured. Before the housing collapse, FHA wrote only 3 percent of all home loans.
Mortgage insurance is paid by borrowers, typically when the down payment is lower than 20 percent. Borrowers pay, but the coverage protects lenders with cash benefits should the borrower default. When lenders foreclose against homeowners with the coverage, it triggers mortgage insurance benefits for lenders to help pay off the mortgage.
Beginning this spring, the FHA will raise mortgage insurance fees that borrowers must pay, cap the amount of cash that sellers can contribute for closing costs and require higher down payments for the borrowers with poor credit scores.
• The new upfront mortgage premium will cost borrowers 2.25 percent of the loan amount, up from the current 1.75 percent and the second increase in the past two years. The upfront premium can be rolled into the loan. Later, some of the cost increase could be added to a borrower's additional annual mortgage insurance premium which is paid monthly.
"Increasing the insurance premium on FHA loans is simply a reflection of the substantial risk the administration has taken on in recent years," says Nancy Osborne, chief operating officer of Erate.com, a Santa Clara, CA-based financial information publisher and interest rate tracker.
• New borrowers must have a minimum FICO credit score of 580 to qualify for FHA's 3.5 percent down payment loan, otherwise the borrower must put 10 percent down. Most lenders require a minimum credit score of about 620. A credit score is a numerical rendition of a borrowers creditworthiness. The higher the score, the better the credit and the better likelihood of qualifying for the least expensive loan.
"The absence of equity in their home has become a key predictor of a borrower defaulting on their mortgage payment in this distressed market. Requiring a greater down payment should be the first step towards more prudent underwriting and lending practices," Osborne added.
• Sellers will only be able to contribute closing costs that amount to 3 percent of the sale price, half the current 6 percent. Experts say the higher maximum encouraged borrowers to mark up the price to compensate for their concession.