FHA announces it will introduce minimum credit score for mortgages it insures

Because it has been hemorrhaging money for months, the Federal Housing Authority announced it will begin to institute a minimum credit score for the homes it insures.

According to a report in the Wasington Post, the FHA will no longer insure mortgages for consumers who have faced credit problems and have a rating of less than 500 because it has seen the cash reserves it keeps to pay for "unexpected losses" evaporate to dangerously low levels in recent months.

The report said that in the past year and a half, the number of FHA-insured loans made up about 30 percent of all new single-family home purchase mortgages, an increase from just 3 percent in 2006. Similarly, about 20 percent of new refinances are also insured by the Authority. However, as the number of loans it insures rose, so too did its default rate, which cost it a significant amount of its reserve money.

The Post said that if the agency runs out of money, taxpayers will have to foot the bill for all the home loans that go bad. By instituting the minimum credit score of 500 for all borrowers, it is trying to insulate itself against the risk of running out of money while still maintaining its key role: keeping the housing market afloat.

According to the Post, not only will the FHA introduce a minimum, but it will also require all borrowers with a credit rating under 580 to have a higher down payment on their home than those that don’t. Currently, borrowers only have to put down 3.5 percent of the home’s total cost, but those with a score below 580 will have to pay 10 percent. This protection should help the Authority considerably, as the percentage of borrowers that are "seriously delinquent" was three times higher for those below that mark than those above it in January, the last month data was available.

However, many mortgage lenders have already been tightening restrictions, the report said. This is one reason that just 1 percent of current FHA-insured borrowers have scores below 580.

These new restrictions could be one reason that home sales have been so slow in recent months despite record lows in mortgage rates more or less across the board.