FHA Minimum Credit Score Declines by 60 Points
Ellie Mae’s third quarter mortgage loan origination insight report spoke too soon. FHA has now lowered its credit score requirement by 60 points. Making it even easier for eligible borrowers to qualify for an FHA-backed loan.
Borrowers with scores of 580 or higher may be able to sign off on a mortgage loan closing now that FHA has lowered its minimum credit score requirement. Compared to last year’s credit score requirement of at least 640, this is a 60 points difference.
The timing couldn’t be any better, with rates already lower than ever and only a 3.5% down payment required under FHA we may see a higher demand for FHA loans with the lowering of its minimum credit score requirement. Home buyers across the nation are in luck this 2014 with the new lenient guideline under FHA.
One of the Most Lenient of Mortgage Loan Programs
Just when we thought it couldn’t get any better with FHA they now have created even more leniency on top of their 3.5% down payment advantage. Today, FHA is considered one of the most lenient mortgage loan programs in existence today for the average borrower.
FHA mortgage loans are insured by the Federal Housing Administration (FHA) and is one of the most popular loans today not only for first-time home buyers, but for current FHA homeowners looking to refinance as well. A lot of talk has been going around about FHA’s high mortgage insurance premiums, but despite this disadvantage for many, they get to take advantage of some of the lowest rates offered by the FHA.
With a great purpose for its existence of making housing more affordable for Americans nationwide, the FHA was formed in 1934 for that particular reason. What most home buyers can easily mistaken the FHA for is that they make loans, when they actually only insure them. The FHA insures mortgage loans that the nation’s bank puts out. This is a great deal of benefit for lenders in the event that a borrower should default on a mortgage loan, the lender would be protected from any loss. However, the FHA can only insure loans that meets its lending standards, along with all other terms and conditions.
Not too long ago, the FHA guideline experienced a revision stating that borrowers under extenuating circumstances; FHA borrowers who had to file for bankruptcy, short sale, or foreclosure were able to purchase a mortgage again after a short wait of only 12 months. Now, the FHA has just woed the nation on its new minimum credit score requirement.
Each mortgage program in existence today has its own set of standard guidelines that all borrowers must meet in order to get an approval, FHA’s guideline is no different, just more lenient than others. These guidelines are implemented to try and filter out the eligible borrowers for approval of a mortgage loan in which the FHA then is able to insure.
Investor Overlays Reduce Chances of Additional FHA-backed Loans
Why are there so many investor overlays?
More than likely there would probably be more mortgage loan approvals if there were less overlays right? Well, one of the reasons why there are so many more restrictions imposed is because lenders want to make sure that they will not get penalized for a bad loan, a loan that is more than likely to default in a short period of time after closing.
These additional measures and restrictions can sometimes make it harder for the average borrower to qualify for an FHA-backed loan. Take for instance, the FHA usually does not require for a second round of credit check and income verification or employment verification, but lenders at times would double check when it comes to FHA’s Streamline Refinance Program. For the same reason as mentioned earlier, lenders must practice precaution to avoid any penalty against them.
Another factor that is considered an investor overlay is the credit score requirement. Even though the FHA is focused on backing up loans for borrowers with FICO score of 500 or higher, the banks tend to shy away from making such loans. Based on case studies in recent years, buyers with a less than creditworthy score reflect as risk-borrowers. The average risk-borrower usually is not able to keep up with payments for more than 6 months.
A mortgage loan default can have several negative affects on a bank’s reputation as well as fines and sometimes even termination from the FHA insurance program, which will make it impossible for the FHA to insure anymore loans from that bank. To prevent this from happening, most banks had to enforce a firm minimum credit score requirement of 680 for FHA loans.
Today, FHA has lowered its minimum credit score down to 580, which has already gone into affect, making it easier for home buyers nationwide in hopes of regaining lost value within the housing market. This may not be the final change that the FHA makes, as we continue to see improvement in the U.S. economy, there may be less investor overlays.
We have a feeling the next quarterly report may be even higher in purchase loan volume than ever before.
Jessica Lucas
