The Federal Housing Commission is making it harder for home buyers to qualify for mortgages to help offset the type of lending that has been a major cause of the current plague of foreclosures. The FHA backs up to half and insures more than a third of all new mortgages, so the changes will possibly affect a large number of home buyers.

Changes to the FHA requirements include higher insurance fees, closing costs caps, and higher down payments for borrowers with poor credit scores. Insurance fees will rise from the current 1.75% to 2.25% and the closing cost fees will be capped at 3% for home buyer contribution instead of the previous 6%. Borrowers whose credit scores rate lower than 580 will be required to submit a down payment of at least 10%; though, borrowers with higher credit scores will not be required to pay more than the current 3.5% down payment.

The agency has previously been criticized for backing mortgages for very little or no down payment; starting home buyers out with no equity at all in their homes which has been a contributing factor in the current economic climate. Whereas the FHA does need to better protect its funds so that a government bailout does not become a necessity, it does also hold some responsibility to helping the housing market to recover as well.

The new requirements are being criticized by some as not going far enough to rectify the poor practices that were previously in place and the problems that resulted from them; while other critics of the changes say that they will result in a delayed recovery for the real estate market.

These changes come only days after the FHA initiated a probe into 15 mortgage companies which have high mortgage default rates that are out of line with other companies. These mortgage companies show a high number of loans that have been defaulted on after a very short time; loans that are quickly defaulted on can be a sign of poor business practices or outright fraud. Though not directly related to the changes in requirements that have been set out, they certainly have had their own impact on the pool of funds that the FHA has to draw on.

The FHA is acknowledging the fact that these changes have been a long time in coming but they are completely necessary to good business and hopes that the new rules will help to benefit the industry in the long run.

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