Tougher Than FHA
February 4th, 2009
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A number of lenders nationwide are offering FHA mortgages — but with terms that are tougher than the FHA requires.
“Wells Fargo & Co., the second-largest U.S. home lender, and Taylor, Bean & Whitaker Mortgage Corp., the biggest privately held mortgage company, are raising credit score requirements and other standards for government-insured loans,” according to Bloomberg News.
“Wells Fargo,” says Bloomberg, “boosted the minimum credit score for Federal Housing Administration and Department of Veteran Affairs loans it makes through brokers to 620, according to a Jan. 27 notice from the San Francisco-based bank. Ocala, Florida-based Taylor Bean ‘recently’ increased its requirement to 600 from 580, Chairman Lee Farkas wrote in an e-mail.”
The Bloomberg report parallels questions I’ve been getting from my syndicated newspaper column. The tighter standards don’t make a lot of sense because, after all, FHA loans are guaranteed by the government. If a borrower meets the federal guidelines and doesn’t pay, then the government steps in to make the lender whole.
My suspicion is that the new and higher standards from private-sector lenders actually have very little to do with borrowers. Instead, it may be that FHA loan originators in general want to bullet-proof their loans so that if there is a failure or an audit they can’t be blamed for sloppy or inadequate underwriting.
It’s not a bad strategy on some level, but a far-better strategy would be to simply follow FHA underwriting standards to the letter. This would allow lenders to meet the requirements for FHA insurance and at the same time to not close the door on would-be borrowers who fully meet FHA demands.
If you have an interest in an FHA loan, then an appropriate question to ask a lender is this: Do you have any requirements beyond basic FHA standards that I have to meet such as, but not limited to, steeper credit scores? If yes, what are those additional standards?
The next question, of course, is this: Why shouldn’t you go elsewhere if Lender Smith has tougher standards than Lender Jones? An FHA loan is a standardized mortgage product, it is the same loan regardless of where you go.
You want to search for FHA lenders because you may get a better rate with some, but the loan terms are always the same. If an FHA lender with tougher application standards can lock-in a lower rate, and if you can meet those higher standards, that could be interesting. However, tougher applications and no better rate are not an attractive combination.
The bottom line, as always: Shop around — and ask questions.
For the full story, see: Wells Fargo, Others Tighten Government-Mortgage Rules
Check here for more information on FHA underwriting guidelines.
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This entry was posted on Wednesday, February 4th, 2009 at 11:47 pm and is filed under . You can follow any responses to this entry through the RSS 2.0 feed. You can skip to the end and leave a response. Pinging is currently not allowed.
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February 8th, 2009 at 10:37 am
Where is the middle class going to end up? gone. Their getting squeezed, you either have or have not.
Loans are not even easing up with the bankout- Where is my bailout?
February 10th, 2009 at 9:51 am
Just wait until the 7 and 10years ARMs are due on some of these overpriced homes!!! We will really be hosed then!! =o(
February 10th, 2009 at 10:41 am
I used to get your publication FHA Mortgage Guide but somehow got deleted from your e-mail file. Would like to get added back as I think the publication is very well done and useful. Our company does FHA, VA and regular mortgages but I specialize in the FHA HECM Reverse Mortgage program.
February 11th, 2009 at 6:56 am
This is just the beginning unfortunately there is $500 billion in Option ARM’s that will be resetting interest rates and/or reached 125% cap on loan to value ratio very soon.
I believe that we will see some severe declines in housing values in next 12 months. This industry is getting the hose….
March 30th, 2009 at 6:21 pm
Orlando, and the problem with these arms and the ability for these borrowers to get out of it is the lenders approved (you notice how I say lender not broker?) and qualified them on the interest only payment (God I hope it wasn’t a stated deal too!) and not the fully amortized payment or at the least dislcose worst case when the libor would adjust and qualify them at the cap rate. We are in big trouble and we have only just begun.
April 19th, 2009 at 4:15 pm
Why, not? Half of Congress takes bribes and payoffs, take their sweet time, while we “eat cake”