In an effort to shore up reserves, the FHA is proposing new requirements that will make obtaining a mortgage significantly more difficult. An article I was reading today, FHA Will Tighten Up in 2010, written by Matt Carter in Inman News, outlines the new requirements HUD is seeking in FHA guidelines for new borrowers.  Here are just a few of the proposed requirement changes:

• an increase of the down payment requirement from 3.5% to 5% — this is to encourage borrowers to have more “skin in the game”
• an increase of the minimum credit score to 620 — a FICO score is a widely accepted indication of the borrower’s probability of repaying the mortgage. The lower the score, the higher the risk of default
• an increase in the premium borrowers pay for the mortgage insurance required by FHA – this will increase both the upfront costs of purchasing a house as well as the monthly payment.

All of this is being proposed in the name of shoring up the reserves that FHA needs in order to cover defaults.  It is also in response to recent moves by Fannie Mae and Freddie Mac to tighten their credit standards to avoid borrowers that present more risk of default.

The National Association of Realtors Weighs In

The fact that this will have an adverse effect on people who want to buy houses by essentially shutting them out of the home buying process and having an adverse effect on home sellers by creating downward pressure on home prices has not escaped the National Association of Realtors.

Vickie Golder, the President of the National Association of Realtors testified before Congress asking them to:

“exercise caution before introducing proposals that may have a profound adverse impact on our economic recovery.”

This is a huge development.  It indicates that one of the most popular mortgage programs in use today is about to get a lot stricter. Less home buyers in the marketplace means that home sellers will be forced to keep lowering prices to attract people who can qualify for a mortgage. If mortgage interest rates begin to rise, which they will, sooner or later, that will also create a smaller pool of financially qualified home buyers.

Bottom line: it may just get a lot tougher to sell a home and to buy a home in 2010.

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