Sue Fox, @Properties. Direct 773.816.1788

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FHA crackdown: Getting a loan will be harder than ever

filed under: Buyers, FHA loans, First-time buyers, Market conditions posted on December 3rd, 2009

As more buyers use FHA to finance their homes, the government clamps down on loans.

The Federal Housing Administration has been putting buyers into homes this year like never before. With the rest of the mortgage market in disarray, FHA has stepped boldly into the gap, insuring mortgages so that banks could keep lending even as default rates continued to climb.

In 2006, when most lenders were happy to hand out money to just about any borrower, FHA mortgages accounted for only about 3% of the U.S. market. Today nearly a third of all purchase loans are insured by the FHA — making the federal government a huge player in the mortgage market, and putting the FHA at huge risk if these loans start to falter.

And falter they have. The delinquency rate for FHA loans is now more than 15%, according to the Mortgage Bankers Association. Which means that the FHA must tighten the purse-strings, making it harder than ever for borrowers to qualify for a loan.

This year, at least half my clients used FHA to seal the deal, either as buyers taking advantage of the low 3.5% down payment these loans require, or as sellers who found an FHA buyer for their home. FHA was the grease that kept the battered, broken-down jalopy known as the housing market running in 2009.

But things are about to change. Among the measures the FHA is considering: Hiking the minimum down payment to 5%. Raising the required credit score to 640 or higher. Increasing the mortgage insurance premiums borrowers must pay.

All of these changes would squeeze out borrowers who have middling credit profiles or who don’t have much cash to put down. They will certainly limit risk for the government… But they will also make it tougher than ever for people to buy a home.

Written by Sue Fox //

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