Due to an increase in FHA loan defaults, the Housing of Urban Development has been considering changes to FHA credit guidelines by implementing credit score minimums. With the government instituting the Dodd-Frank mortgage reform bill there is increasing pressure for HUD to mandate new guidelines with FHA minimum credit scores. Since 1934, FHA credit guidelines have never mandated any credit score requirements so the proposed changes could have a significant impact on government home buying and refinancing.
FHA Remains the Best Loan Program for Credit Score Flexibility
2011 FHA loan requirements have tightened for lenders as their net-worth requirements have increased and loan companies have more liability for their FHA home loan originations. Because of these changes in home financing legislation, FHA underwriting has become more critical of credit scores and delinquent loan payments. It’s clear that HUD is mandating more responsibilities for borrowers, appraisers and FHA lenders in an effort to reduce foreclosures and loan defaults while increasing FHA reserves. Some of the new rules are likely part of a compromise to politicians looking to have material to campaign on, but most of the revised 2011 FHA requirements are being implemented to improve the FHA loan programs for consumers. HUD remains committed to offering loans to borrowers with all types of credit from all types of neighborhoods.
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Last year, HUD announced new changes for 2011 FHA guidelines including minimum credit scores needed for certain FHA loan programs. In the past, FHA was the only loan product that did not have minimum credit scores. However, most Approved FHA lenders and banks incorporated their own minimum credit score requirements on loans that were insured by Federal Housing Administration. The FHA credit guidelines continue to be more lenient than conventional credit guidelines as FHA will allow lower credit scores for borrowers who have compensating factors. For example if a borrower had a low credit score because of a medical collection a few years ago that they were able to document, the likelihood of being approved by a FHA underwriter is good if there are compensating factors like additional equity and strong income. With FHA being the last bad credit mortgage loan left on the on the planet, many consumers and loan professionals are nervous about the proposed 2011 FHA credit guidelines.
In most cases, to qualify for maximum financing on new home loans, applicants need to 580 credit score or higher. If a borrower with a credit score between 500 and 579 has the ability to put down a significant down-payment of at least 10% then exceptions can be made and with the right qualifications the purchase loan would be approved. The same could be said with a mortgage refinance loan, if the borrower has credit scores between 500 and 579 and they get two appraisals documenting at least 10% equity in the home.
- 85% Max Loan to Value 500 – 579 credit scores with FHA 203(b) for cash out refinancing
- 96.5% Max Loan to Value 580 + for refinancing with the FHA streamline
- 90% Max Loan to Value 500 – 579 credit scores
- 100% FHA financing with no down payment required with FHA 203(h) for Disaster Victims
- 115% FHA Streamline 203(k) for Limited Home Repairs and Rehabilitation
According to HUD’s 2011 FHA guidelines, Applicants must have a fico score of at least 500 to be eligible for home buying or refinancing with FHA. However, we are hearing that many borrowers with sub-500 credit scores are still being approved for FHA loans as long as they have very strong compensating factors that are signed off by direct endorsed underwriters who have the ability to make exceptions. The reality is that HUD is tightening FHA refinance guidelines in 2011 and credit seems to be more important than in previous years. Let’s not hit the panic button yet. The chances remain good, that FHA will remain the loan of choice for borrower with past credit problems as FHA lending has always made it a priority to be flexible with credit, equity and affordability.
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