November 18th, 2013
FHA-insured loans have been available since the 1930s when they were introduced as a method to help low- and moderate-income families become homeowners. These low-down-payment loans have waxed and waned in popularity over the years depending on what other loan products are available from lenders; but after the housing crisis, many borrowers turned to FHA lenders because FHA loan guidelines are generally looser than conventional loan requirements. Eventually, lenders began to add their own requirements above FHA mortgage requirements and consumers found it more difficult to obtain an approval even for these government-insured loans.
While the FHA requirements include a minimum standard set by the FHA such as a credit score above 580, most lenders require a credit score of 620 or 640 or higher. Some lenders have even higher standards.
Credit scores and debt-to-income ratios
A recent report from Ellie Mae, a company that provides mortgage loan data, shows that more consumers are being approved for FHA loans with lower credit scores and higher debt-to-income ratios than in 2012. For example, the average FICO score for FHA refinance loans in 2012 was 718; in September 2013, the average FICO score for an FHA refinance was 687. The average debt-to-income ratio in 2012 for an FHA refinance was 39 percent; in September 2013, the average rose to 40 percent.
For purchase loans, the average FHA credit score in 2012 was 700; in September 2013, the average credit score for an FHA purchase loan was 694. The average debt-to-income ratio for purchase loans for both periods was 41 percent.
FHA loan pros and cons
The number of FHA loans as a percentage of all approved home loans dropped from an average of 23 percent in 2012 to 19 percent of all mortgages in September 2013. One reason for this decline in popularity is that FHA loans, while they generally have lower mortgage rates than conventional loans, have higher mortgage insurance premiums. In addition, those premiums typically must be paid for the life of the loan.
FHA loans have value, though, for borrowers who have low home equity when refinancing or want to make a minimum down payment of just 3.5 percent when purchasing a home. In addition, the credit score requirements and debt-to-income ratios are looser than conventional loan guidelines.
Consumers who want to refinance or buy but have cash or credit challenges can compare both FHA loan and conventional loan options by consulting a mortgage lender.