Consumers who want a home loan will now have to have a considerably higher credit score than they used to.
According to a report from the Washington Post, the Federal Housing Administration has recently made it harder for consumers to qualify for insurance on their home loans, and will soon add even more restrictions. In the last 18 months, FHA-insured loans have made up about 30 percent of all mortgages for consumers buying new homes, up from just 3 percent in 2006. The FHA also insures 20 percent of refinances.
The report said that the rise in the number of loans the FHA insures has also caused a sharp increase to its total default rate. As a result, the FHA has seen its cash reserves for "unexpected losses" depleted to dangerous levels, meaning that if it were to run out, taxpayers would have to bail out other consumers who defaulted on their mortgages.
A separate Washington Post report said that, because of this, the FHA recently announced it will now institute a minimum credit score a borrower must have to qualify for a loan insured through the administration. The new minimum will be a score of 500 to qualify at all, and borrowers with a score below 580 will have to make a down payment of at least 10 percent. Currently, the FHA only requires a down payment of 3.5 percent.
The report said that these minimum levels were arrived at because the percentage of borrowers who were "seriously delinquent" with their home loan payments was three times higher for borrowers with scores below 580 than it was for those with scores above that number.
The report said that as it is, lenders have already been imposing similar minimums on consumers even without the FHA's requirements. This could be one reason that consumers with mortgages for single-family homes make up just 1 percent of the total the FHA insures.
Though interest rates on mortgages of all types have hovered at or near record-lows for the last few months, there has not been a significant uptick in the number of home sales or refinances. These toughened standards are a possible cause for the low number of mortgage applications seen across the country over roughly the same period.