If new rules are approved as expected this month, first-time home buyers are likely to face more challenges when applying for a Federal Housing Administration (FHA) backed loan.

The new rules, which include larger down payments and higher monthly fees, are meant to beef up the FHA’s reserves. The reserves are used to settle bad loans. In a report, the Department of Housing and Urban Development said FHA’s reserves stand at only $3.5 billion – a far cry from the $19.3 billion it held in September 2008.

Among the changes would be higher monthly fees. This change is expected to take effect this month, once the president signs a legislation already approved by Congress. If it is signed into law, it will allow the FHA to raise the monthly fee up to an annualized 1.5% of the loan balance. It was higher the precious cap of 0.55%. The FHA is expected to raise fees 0.9% first. The initial fee, an upfront payment, was earlier increased to 2.25% from 1.75%. However, the government agency said it will be brought down to 1% when the higher fees take effect.

Home buyers who have poor credit scores are also likely to face an uphill climb with FHA backed loans. A proposed change in rules will require home buyers to have at least a 500 credit score before the FHA backs their loan. This is a first since the government agency has never sought a good credit score from home buyers since it was established in 1934.

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