After the subprime mortgage crash, FHA took on more lending with their FHA loan programs than any other type of home loan in the mortgage business. FHA guidelines have always kept an open mind in that they look at the borrower rather just the borrower’s credit score. This type of underwriting worked great when the FHA loans were performing, but as soon as FHA loan defaults rose to record levels in 2008 and 2009, something needed to be done to the FHA loan requirements to prevent the foreclosures and diminishing FHA reserves.
HUD decided to raise the FHA requirements and make some other changes with FHA guidelines in an effort to prevent the bad mortgages that first the first time since 1934 put the government loan program in jeopardy. The first change HUD made was to increase the down-payment requirements for home buying. The new FHA loan requirement for a down-payment was raised to 3.5%. HUD also limited FHA refinancing to 96.5% rather than 97%. Then the government agency decided it was not fair to roll lending fees into the FHA streamline loans. Next change came from FHA lenders who were starting to require higher credit scores. One good thing HUD did in 2010 was to keep the FHA loan limits unchanged.
We understand HUD’s moves to minimize the FHA loan defaults, but going away from the FHA credit guidelines and allowing FHA lenders to dictate higher credit scores may significantly reduce its appeal to home buyers and consumers looking to refinance into a more affordable fixed rate. Credit scores can be very misleading and someone needs to give these borrowers another shot.
