Borrowers Need More "Skin in the Game" for FHA Loans in 2010

Borrowers will need a higher minimum FICO score and a bigger down payment soon as the government tightens guidelines for FHA loans.

President Obama is moving very diligently to make FHA guidelines/underwriting standards tighter on Government backed mortgages. What exactly are they looking into…

Borrowers must increase the amount of down payment/up front monies they must bring to the closing
Raising the minimum FICO score requirements
Reducing seller concession allowable from 6% to 3%

My Thoughts

The Government wants all Borrowers that get approved for FHA Government financing to have more of their own money put into the transaction from day one… the phrase “skin in the game” comes to mind. The obvious way to do this is to raise the current down payment guideline up from 3.5%. My professional guess is the minimum down payment required will increase to 5% and a Borrower will no longer be able to finance closing costs.

Coming up with another 1.5% in down payment is much easier than lets say increasing your Fico score up 30 points to meet the new lending FHA guidelines. This would be the second time that FHA FICO score guidelines have gone up in the past year. They went from 500 to 580 and I would guess the new proposed minimum will be in the 620 range. The funny thing is three years ago you could almost get a conventional loan with a 620 mid FICO score and relatively soon you may not even be able to get a FHA loan with the same credit profile!

The practice of seller’s concession involves artificially increasing the sales price to pay for closing costs. Currently the maximum seller’s concession is 6% and I can see it going down to 3%. I never agreed with this idea because often, the appraisals were not coming back approved at the higher sales price.

The FHA is in a tough spot, people. Conventional mortgages through Fannie Mae & Freddie Mac have been tightening their guidelines for over two years now. This has put more and more potential borrowers into FHA loans. In 2010 to be a FHA Borrower you MUST have a mid FICO score of 620 or greater, you MUST have a higher down payment and do not count on financing your closing costs. You need to have more “skin in the game.”

bc@SmarterBorrowing.com 617.771.5021