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FHA Commissioner Still Mulling Over Minimum Credit Score, Other Requirements

By Sally Maison
Published: Sunday, January 24th, 2010

Twenty five years ago, David Stevens, was able to buy his first home with only 3 percent down payment even if he did not have money in the bank. It was simply because his loan was backed by the Federal Housing Administration (FHA), the same agency he is leading right now.

FHA Commissioner Still Mulling Over Minimum Credit Score, Other RequirementsA few years ago, lax lending standards allowed many homeowners with little bank money and low credit ratings to avail FHA-backed loans. However, today, the current FHA commissioner is facing a dilemma of whether to raise credit score and other requirements, and to what extent.

The FHA just raised its minimum credit score requirement in December, but they may have to do so again as Stevens is looking to revise existing lending standards. Aside from establishing a new minimum credit score, Stevens is also considering raising minimum down payment, reducing the amount of money sellers can apply on closing costs, and increasing mandatory payment for mortgage insurance.

The possible changes are geared towards helping the FHA continue meeting its obligations to borrowers. If delinquencies for FHA-secured loans increase further, the agency fears that it could no longer continue to insure loans for others who need it. This places a pressure on Stevens, as he tries to decide how many others like him he would let through. Stevens is now being pressured by Congress to toughen easy lending standards that once helped people like him purchase their own homes.

The FHA does not grant loan to homebuyers, but secures it for them, allowing them to purchase property at low down payments. Having a federal-backed loan also allows buyers to purchase at low interest rates even if they do not have prime credit ratings. The stable housing market helped the FHA generate profit for taxpayers. At the height of the housing market boom, subprime borrowers tried to compete with the FHA by offering more favorable terms to borrowers.

Unlike the Housing Administration, subprime creditors lend money without requiring income documentations. Since subprime lenders extend credit to low credit score borrowers, they are lending to people who are at great risks of defaulting. Extremely lax lending standards has allowed many people to buy their first homes, but it also triggered the industry to collapse.

After the mortgage crisis, creditors began steering borrowers back to FHA-backed loans. Federal-insured loans, which were only 2 percent of the total number of housing loans in 2006, now make up 25 percent of all mortgages.

However, Stevens says the FHA must not play such huge a role since it is not healthy for the mortgage industry and the whole economy. Analysts are anticipating major changes to come this year.

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