FHA Changes Loan Guidelines: 5% Downpayment Requirement for Low FICO; Mortgage Insurance Bumped from 1.75% to 2.25% of Loan Balance

FHA Loans, with low downpayment and credit score requirements, have tightened their underwriting guidelines:

• Mortgage insurance will be raised from the current 1.75% of loan balance to 2.25% of loan balance
• Downpayment requirements for those with FICO below 580 will be increased from 3.5% of purchase price to 5% of purchase price [note that FICO below 620 is considered 'subprime']
• Allowable seller credit will be reduced from 6% of purchase price to 3% of purchase price

FHA loans, which totaled less than $100 billion in 2007, increased to over $360 billion in 2009. HUD has initiated these guidelines, in part, because 1 in 6 FHA loans is now delinquent.

In other FHA news, the agency has now waived a requirement that 90 days pass before "flipped" REO properties are eligible for FHA loans. This will help move the inventory in areas dominated by distressed properties.