OverviewOn July 15, 2010, the Federal Housing Administration (FHA) published a notice in the Federal Register to revise its underwriting guidelines for Single Family loan originations and elicited comments from the public. The notice (hereafter "Proposal") would tighten only those portions of its underwriting guidelines that have been found to present an excessive level of risk to both homeowners and FHA.
FHA proposes to:
- Reduce the amount of closing costs a seller may pay on behalf of a home buyer purchasing a home with FHA-insured mortgage financing for the purposes of calculating the maximum mortgage amount. This proposed cap on ''seller concessions'' (i.e., also known as "seller contributions") will minimize FHA exposure to the risk of adverse selection.
- Introduce a credit score threshold as well as reduce the maximum loan-to-value (LTV) for borrowers with lower credit scores, who represent a higher risk of default and mortgage insurance claim.
- Tighten underwriting standards for mortgage loan transactions that are manually underwritten. These transactions have resulted in high mortgage insurance claim rates and present an unacceptable risk of loss.
Comment Due Date: August 16, 2010
If you have any questions about this matter or would like assistance with mortgage compliance, please contact Jonathan Foxx, Managing Director or call 516-442-3456 x 100.
Reduction of Seller Concession
HUD's existing policy regarding concessions is found in Handbook 4155.1, section 2.A.3 and Handbook 4155.2, section 4.8, which define seller concessions and provide that any concessions exceeding 6 percent must be treated as inducements to purchase, resulting in a reduction in the FHA mortgage amount. This notice proposes to reduce the 6 percent limitation defined in the Handbooks to 3 percent.
New LTV Ratio and Credit Score Requirements
FHA is proposing to introduce a minimum decision credit score of no less than 500 to determine eligibility for FHA financing and reduce the maximum LTV for all borrowers with decision credit scores of less than or equal to 579.
Maximum FHA-insured financing (96.5 percent LTV for purchase transactions and 97.75 percent LTV for rate and term refinance transactions) would be available only to borrowers with credit scores at or above 580. All borrowers with decision credit scores between 500 and 579 would be limited to 90 percent LTV.
On all manually underwritten mortgage loans, borrowers will be required to have minimum cash reserves equal to one monthly mortgage payment, which includes principal, interest, taxes, and insurance(s). Maximum housing and debt-to-income ratios will be set at 31 percent and 43 percent, respectively. Borrowers with credit scores of 620 or higher may exceed the qualifying ratios of 31/43 percent, not to exceed 35/45 percent provided that they are able to meet at least one of the compensating factors stated in the Proposal.
To exceed the qualifying ratios of 35/45 percent, not to exceed 37/47 percent, borrowers must meet at least two compensating factors, as stated in the Proposal. Any other compensating factors are not acceptable. Mortgage lenders cannot use compensating factors to address unacceptable credit. While this notice does not address the interplay of the housing and debt-to-income ratios, FHA is seeking comment on how to serve borrowers with housing ratios above the threshold and debt-to-income ratios below the threshold (i.e., 36/36 percent).
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Risk Management Initiatives: Reduction of Seller Concessions, New Loan-to-Value, and Credit Score Requirements, FR: Vol. 75, No. 135, 7/15/10
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