FHA Revisions Expected to Reduce Risky Loan Approvals

April 10, 2019

Recent changes to Federal Housing Administration (FHA) mortgage loan policy may squeeze middle-income homebuyer hopefuls, just as the hot spring real estate season begins. 

In March, the FHA put into effect new guidelines to tighten lending standards following its identification of risk trends of the past few years, including the rise of borrowers with debt-to-income ratios above 50 percent, more mortgage originations to borrowers with low credit scores and the lowest average credit score since 2008, and 60 percent more homeowners refinancing their FHA loans to take cash out of their home's equity, The Washington Post reports.

The FHA mission has been to support sustainable homeownership for borrowers with moderate incomes and less-than-perfect credit. Mortgage insurance premiums paid by FHA borrowers are meant to mitigate the risk for lenders of a default, making them more likely to approve a loan for a borrower with a low credit score and extra debt. The minimum down-payment requirement of 3.5 percent makes the loans attractive to first-time home buyers.

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