FHA Fine Print Reduces Allowable Lender Contributions

FHA published a proposal on July 15th announcing changes to important underwriting requirements. Lenders and brokers must be aware of a problem in the fine print and respond to FHA immediately! FHA is not only changing the maximum seller contribution from 6% down to 3% they have changed the definition of ‘interested third party’ in a footnote at the bottom of page 41220. FHA’s 4155.1 currently states the definition of an interested third party as follows: “A third party contribution is a payment by an interested third party, or a combination of parties, toward the buyer’s closing costs, per ML 06-04 prepaid expenses discount points, and other financing concessions. Note interested parties include real estate agents builders, and developers.” The proposal is defining an interested third party to include the “seller, builder, developer, mortgage broker, lender or settlement company.” This is a dramatic change that would create an even larger cash expenditure from the borrower which in turn will cut more first time home buyers out of the market. We have no reason to believe that FHA is intentionally trying to slip this one in but it is up to the industry to respond to the proposed rule and make sure this doesn’t go into effect. To make a comment about this proposal go to and search for the FHA Risk Management Initiative Notice (this is a ‘notice’ versus a proposed rule).  Here is a link that can take you straight to the right page. This proposal will also make the following changes:
  • Set a minimum credit score of 580 for 90.01 LTV and higher
  • Establish a minimum credit score of 500 with an exception for loans involving a reduction of existing mortgage indebtedness where there is a short payoff
  • Establish manual underwriting standards:
  • Ratios firm at 31/43 up to a credit score of 619
  • credit score above 620 can go to 35/45. Ratios of 37/47 will be permitted with two compensating factors from a very short and specific list
  • 1 month PITI in reserves required
We will have more on the other FHA proposed changes soon.