Everyone already knows that the mortgage crisis obliterated the mortgage market, but many aren’t aware of how this changed the face of a tiny government agency, the Federal Housing Administration.  Prior to the crash the FHA only guaranteed 3% of new home mortgages against default.  Today they guarantee about 30% of new home mortgages.  Why are they insuring 10 times as many mortgages today?  Because they haven’t changed their lending standards, but the banks have.  Gone are the days when you could get a mortgage from a bank with a sub 600 credit score, but that’s not true for FHA loans.

While this might be great for a first time home buyer, the FHA has a government mandate requiring the agency to maintain certain reserves to back defaulted mortgages, reserves they no longer have as the number of loans they back has exploded.  Because of this the FHA is under a lot of pressure to change their lending standards, increasing borrower requirements to limit the number of mortgages they back.

The HUD secretary yesterday outlined a series of steps the agency has planned to meet the reserve requirements, while still making sure FHA loans are accessible and safe.  The 5 steps outlined are below.

• More money down: The FHA’s low down-payment requirement—of just 3.5 percent—is one of the main reasons that agency-guaranteed loans have become so popular. Home loans without FHA backing can come with down payments anywhere from 10 to 20 percent, depending on the market, borrower, and other factors. But the FHA’s deteriorating balance sheet has triggered calls for the agency to force borrowers to put more cash down.  Legislation has been introduced by Rep. Scott Garrett, a New Jersey Republican, to boost the minimum down payment to 5 percent. The HUD secretary indicated that the agency is considering higher down-payment requirements. “We have made the decision to exercise our authority to increase the upfront cash that a borrower has to bring to the table in an FHA-backed loan—to make sure that FHA borrowers have more ‘skin in the game’ and a stronger equity position in their loans.”  No word though on how large the potential increase may be though, but details have been promised for January.  Experts estimate the 3.75 – 4% range.  So if you get an FHA loan for a $150k house after the changes go through, you’ll need at least $5,625 for a down payment instead of $4,500.

• Higher fees: The HUD secretary also suggested increasing the insurance premiums changed by the agency would inflate their dwindling cash reserves to the mandated levels.  This requires Congress to raise the premiums though, because they’re already at the maximum allowed by law.

• Better credit: The agency will, perhaps temporarily, increase the minimum credit score for new borrowers.  Right now it’s at 500, but it’s pretty irrelevant because they’re merely backing the loans, the actual lenders have much higher standards.  Experts seems to think we’ll see the requirements shoot up to at least 650 though.

So what does all this mean?  It means fewer FHA backed loans, and the ones they do back will be more stable than the ones they’re currently backing.  So if you’re on the edge with your credit and down payment savings, move fast before standards change, or else start working on getting that credit score  higher and saving up more money for a down payment.