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FHA to toughen rules for obtaining mortgages

With rising mortgage defaults and some of its cash reserves below mandated levels, the Federal Housing Administration Wednesday announced changes that will lead to higher mortgage insurance premiums and make it harder for those with poor credit to buy homes.

The new standards are aimed at reducing risks but might force buyers in areas like Long Island, where housing costs are high, to save more for their American dream. For example, the concessions that sellers can make toward closing costs will fall from a maximum of 6 percent to 3 percent, which federal officials have said would guard against sellers inflating prices over appraised value, as well as discourage sales to buyers more likely to default.

"I'm looking for a seller's concession because there's all these added expenses at closing, and I'm nervous," said Central Islip renter Melinda Smith, 35, who learned about concessions at the nonprofit Community Development Corp. of Long Island and is finding it tough to put 5 percent down on an $188,000 Islandia ranch. "I don't want to walk into my house without any savings."

FHA, which insures about 30 percent of mortgages and 50 percent of first-time purchases, will link higher down-payment requirements to a buyer's credit score, and charge a 2.25 percent mortgage insurance to help pump up agency reserves. Other changes, including some that need Congress' approval, will ratchet up monitoring of lenders, including a public report card that will rank lending firms on performance.

FHA Commissioner David Stevens said some borrowers will be rejected under the new standards but called the changes overdue. "They're significant, but they will not be overwhelming," he said.

FHA is about the only alternative for borrowers who don't qualify for prime loans, and lenders have been jumping into the program since the subprime market imploded in August 2007. Last year, FHA insured 1.9 million loans, up from 1 million the preceding year; if the loans go bad, FHA pays the lender.

Mike McHugh, vice president of Empire State Mortgage Bankers Association and a Melville-based lender, said lenders were worried that the new policies would kick the housing market when it's already down. But Wednesday, he and others agreed with Stevens that the new standards strike a balance between cutting risks and keeping the market rolling.

The tight credit market had already tweaked standards implemented by individual lenders, and many have set higher standards. At Bohemia-based Mortgage Concepts, owner Steven A. Milner said he does not give loans to anyone with less than a 620 credit score.

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