Minimum Qualifying Credit Scores Has Dropped on FHA TransactionsCredit Scores You may know that a couple of years ago FHA and HUD implemented new insured mortgage lending standards. These standards improve the minimum qualification requirements for the benefit of borrowers. These new standards stipulate:
- The MID FICO score of 580 or higher can qualify you for an FHA insured mortgage loan with a LOW 3.5% down payment. The 3.5% is calculated from the lesser value between purchase price or the properties appraised value.
- The absolute minimum credit score we can accept for FHA is 550. If your credit score ranges between 550 and 579, you will have to come up with a down payment of at least 10%. This gives you a Loan to Value (LTV) of 90%.
- FHA allows you, the borrower, to receive funds for the required down payment from family members and not from your own pocket. If such funds are offered by a donor, you have to obtain and present to FHA a letter from the donor stating that they do not expect any form of repayment and the donated amount is truly a gift and not meant to be repaid.
How Credit Scores Affect lending institutionsThe fact that the national average credit score is 678 and the median FICO score in is 723 while 58% of Americans have credit scores above 700 allow lenders to have enough business with minimum risk. If you wonder what was the risk the banks and mortgage companies want to avoid we can tell you that FHA actually penalizes lenders for default loans. Even if the default happens months or years later and even if the borrowers entering default represented a perfect fit with the FHA’s published guidelines. If a lender has too many bad loans FHA can revoke lender’s permission to offer FHA loans. For some smaller lenders, this literally meant going out of business. FHA used to compare lenders offering FHA products from the same geographical area – the compare ratio method. If one lender has 150% more late-paying loans than the lenders from the same area, they are at risk of being excluded from the list of FHA-approved lenders. The bottom line of this rule was that higher credit score practiced by one lender and as a consequence, fewer default loans forced all the other lenders to move into the same direction and increase the FICO credit score accepted for an FHA loan. In this landscape, FHA added another layer of evaluation for lenders, beyond the existing compare ratio method. FHA will also start examining from now on late-paying loans based on the borrowers’ credit scores brackets:
- Less than 640
- Between 640 and 680
- Greater than 680
The future of credit scores and lendingThis change will not modify the lending environment of tomorrow. Some lenders will wait to see what happens with the early adopters. So, if you are wondering what to do here are some options: Many internet sources will tell that the best path to choose is to improve your credit score. Many agree that you need to be patient because increasing your FICO score takes time. Others will advise you to contact many lenders until you find one already accepting the minimum score required by FHA. We give you a third, better option. Don't wait or shop around. See if you qualify for an FHA insured mortgage loan with a credit score of 580. Come to Casey Moseman @ All Western Mortgage (AWM)! She will find the right lender for you. We now work with people that have lower than average credit scores and we can help you.
CASEY MOSEMAN, CMPS 702-271-1274