FHA Wants to Tighten Limits

The Federal Housing Administration is about to beef up the borrowing requirements for home buyers, a move that could dampen the fragile housing market's recovery. Home buyers are going to have to dig deeper in their wallets to purchase a home.

Currently, borrowers are required to have a 3.5 percent cash down payment and the FHA wants that raised so that borrowers have more invested.

While the FHA plans to increase minimum credit scores "for the time being," it also is studying whether such an increase should be combined with other changes in underwriting requirements.

The agency also plans to seek permission from Congress to raise the annual mortgage insurance premiums.

One specific that is expected will be for sellers to be able to help buyers with only 3 percent, rather than the current 6 percent, of associated closing costs.

The moves affecting home buyers are part of a three-tier plan by the FHA to lessen risks to its portfolio. The agency also plans to take steps to increase FHA capital and to hold lenders more accountable for the quality of loans they write.

The changes come at a time when the FHA has become an important cog in the home-buying machine, insuring almost 30 percent of home purchases – more than 75 percent of which are to first-time home buyers – 20 percent of mortgage refinancings. Just three years ago, the FHA's share of the mortgage market was 3 percent.