FHA tightens mortgage regulations for riskier homebuyers

• The Federal Housing Administration is tightening its rules for insuring higher-risk mortgages.
• That promises to make it harder for first-time homebuyers and people with lower incomes to purchase a starter home.
• The agency said it saw an increase in riskier mortgages after removing manual underwriting requirements in 2016.

First-time homebuyers and people with lower incomes are about to find it harder to purchase a home. The Federal Housing Administration, which insures government-backed mortgages, announced this month that it's tightening rules on higher-risk mortgages. The FHA is reintroducing manual underwriting requirements it removed in 2016, so that mortgage applicants with weaker credit scores and higher debt burdens will get closer scrutiny.

The rule change will affect some 40,000 to 50,000 borrowers a year, according to The Wall Street Journal. The FHA insured over 1 million mortgages for single-family homes in 2018.

The agency said it saw an increase in the high-risk mortgages it's backing after it removed manual underwriting requirements. Last year, it found that average credit scores for borrowers fell to 670, the lowest in more than 10 years. The FHA is concerned that backing higher-risk loans can potentially lead to defaults, depleting cash reserves the federal agency uses to insure mortgages.

The changes will mostly affect millennials, who have taken over the bulk of homebuying from baby boomers and Generation X, as they get older and more established in their careers. Millennials looking for starter homes are also more likely to carry student debt, narrowing their chances that they'll qualify for a government-insured loan.