FHA commits to additional tightening Tougher underwriting for borrowers with low FICO scores in the works

The Federal Housing Administration has committed to several changes to FHA mortgage programs that, while less drastic than measures proposed by Senate Republicans, will limit the ability of some borrowers with low credit scores to qualify for loans, and raise minimum down payment requirements and premiums for borrowers taking out mortgages larger than $625,000.

The changes are designed to shore up FHA’s reserves after the agency reported a $16.3 billion deficit in a report to Congress last month, raising the specter that FHA will require a taxpayer bailout next year for the first time in its 78-year history.

Sen. Bob Corker, a Tennessee Republican, announced today that the FHA had committed to change and that in return, he will support Acting FHA Commissioner Carol J. Galante’s nomination to be FHA commissioner.

Corker released a letter from Galante, who promised FHA would “move on” several policy changes by Jan. 31, 2013:

  • Increase underwriting criteria for borrowers with FICO credit scores between 580 and 620 by establishing a maximum debt-to-income ratio.
  • Increase the down payment requirement and the insurance pricing for loans between $625,000 and $729,000 to protect FHA against loss on high balance loans that are outside Fannie and Freddie conforming loan limits and scale back the government’s footprint in the housing market.
  • Crack down on lenders that advertise under the false pretense that borrowers can “automatically” qualify for an FHA-insured loan three years after a foreclosure. Borrowers who have experienced a foreclosure must have re-established good credit and meet underwriting criteria, including the policy change outlined above for borrowers with credit scores under 620. FHA also committed to analyzing whether a foreclosure due to a one-time event, such as a job loss, resulted in a different or better performance than other reasons for foreclosure.
  • Place a moratorium on the full drawdown reverse mortgage program, the Standard Fixed Rate HECM, to assess its viability after $2.8 billion in losses.

In her letter to Corker, Galante said FHA is finalizing a letter to lenders that will require borrowers with FICO scores below 620 to have a total debt-to-income ratio of no more than 43 percent to be eligible for processing through FHA’s automated underwriting system, TOTAL Scorecard. Borrowers with DTIs exceeding 43 percent will have to be processed manually, with lenders documenting compensating factors such as a larger down payment or a higher level of reserves.

Galante said FHA will raise the minimum down payment on loans between $625,500 to $729,000 from 3.5 percent to 5 percent. Since June, FHA has been pricing mortgage insurance premiums for loans in that range at 150 basis points, instead of 125 basis points. Another premium increase announced in November will raise the premiums to 155 basis points — the maximum currently allowed by law.