FHA to Tighten Credit Score Requirements for Borrowers

FHA loansThe Federal Housing Administration will require new borrowers to have a minimum FICO score of 580 to qualify for its flagship 3.5 percent down-payment program – and those with scores of less than 500 will no longer qualify for FHA-insured mortgages.
The FHA is seeking public comments on several policy changes aimed at bolstering its depleted capital reserves, while keeping intact its mission of facilitating home ownership in underserved communities.
The new policies, first announced in January, will also require new borrowers with credit scores of less than a 580 to make a cash investment of at least 10 percent.
The rule that makes borrowers with credit scores of less than 500 ineligible will likely have minimal impact. Less than 1 percent of borrowers fall in that category. Most FHA-backed loans go to borrowers with minimum credit scores in the mid-600s.
But the rule change is just one of many to reduce risk in a still very fragile mortgage financing industry.
“These are the latest in a series of changes to allow the FHA to manage its risk better while continuing to support the nation’s housing recovery,” said FHA Commissioner David Stevens. “By protecting FHA’s capital reserves, we can continue providing affordable, responsible mortgage products and will remain the nation’s largest source of home purchase financing for underserved communities.”
The FHA does not lend to home buyers, but provides mortgage insurance for those who meet its down payment requirement and other standards. In the aftermath of the housing market bust, the agency’s business has soared as private mortgage lenders have further tightened credit.
The FHA currently insures about 30 percent of home purchase mortgages, up from about 3 percent a few years ago.
However, FHA reserves to cover losses have plummeted to about 0.5 percent of insured loans the FHA has in force — well under the 2 percent coverage ratio required by Congress.
The FHA also will reduce allowable seller concessions from six to three percent.
“Allowing sellers to contribute up to six percent of the home’s sales price to offset a buyer’s costs exposes the FHA to excess risk by potentially driving up the cost of the home beyond its appraised value,” the FHA said in a statement this week.
Reducing seller concessions to three percent will bring FHA in line with industry standards.

6 thoughts on “FHA to Tighten Credit Score Requirements for Borrowers

  • July 18, 2010 at 4:31 pm

    I’m not surprised; I’ve been seeing FHA moving toward this credit range for a while. Actually don’t be surprised if you see them moving to the 600 and 620 ranges soon. It simple math, reliable borrowers cost the lending institution and the ones insuring the lending institutions (FHA) less money in the long run.
    I’m sure FHA is thinking that by making those borrowers with lower credit scores make a bigger commitment, they’ll have a bigger stake in the home and thereby be more willing to stay up to date with their mortgage.
    the new FHA move helps the majority of the borrowers, because it help FHA insure more loans in the long run, by avoiding those loans that would eventually default.

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  • July 18, 2010 at 6:29 pm

    Very good article – our company works with the real estate community to invest in short sale properties. Interestingly, not many of these were FHA backed mortgages. It is truly my fear that dropping the seller assist from 6 to 3 percent is going to have a detrimental effect on home sales. FHA is the most commonly used mortgage product today especially for first time buyers. Whether or not the FHA allows sellers to contribute to the buyers closing costs does not seem to have any direct affect on the likelihood that the borrower will default.
    I agree with the credit score requirements anyone who buys a home should have their finances in order. However in today’s economy, it’s not always easy to save to buy a home, and down payment assistance is almost always a deal maker or breaker.

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