The Federal Housing Administration (FHA) has been one of the biggest sources of affordable loans for Americans, especially in the wake of the credit crisis and mortgage meltdown. The agency, which is part of the Department of Housing and Urban Development, insures mortgage loans made by banks and other lenders to protect those lenders from losses resulting from foreclosures and mortgage delinquencies. Because the FHA offers insurance as a kind of backstop, lenders are able to charge borrowers less for their loan – including smaller down payments, closing costs, and other fees.
But now the FHA – which insured nearly a third of all new mortgages made in the USA in 2009 – says it will increase the premium it charges for its mortgage insurance and require bigger down payments from those borrowers who do not have good enough credit.
 
Those wanting to use an FHA mortgage will have to start paying an insurance premium of 2.25 percent, whereas the premium used to be only 1.75 percent. That will raise the monthly payment of borrowers slightly, which is probably not going to be too much of a hurdle. But what may be more of an obstacle to home ownership is the new plan to reduce the amount of money sellers can contribute to help pay for buyer closing costs. They used to be able to pay up to six percent of those costs, which was a huge perk for buyers, but the FHA plans to slash that amount by 50 percent. Regarding credit scores, the FHA has raised the score needed to get its best deals – which involve only having to pay about three or 3.5 percent down to purchase a home.

Those with scores below 580 will now have to pay a much larger down payment. But those familiar with the FHA say that this new FICO score rule will not present a big problem to the average borrower, because already the average score of the typical home buyer who uses an FHA loan is in the mid-600 range. Meanwhile the agency said it will strengthen oversight of lenders to make sure that they comply with all FHA regulations, a step that might help to reduce lender fraud and more foreclosures.

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