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FHA Refinancing & Credit Scores

by Peter G. Miller
September 1st, 2009

The latest figures from HUD show that as of the end of July the typical FHA borrower has a credit score of 670.

HUD no doubt includes such information because it wants to show the public that its FHA mortgage borrowers are well-qualified for financing. Fair enough, in fact the FHA generally has no credit score requirement:

The FHA, says HUD, “does not have minimum credit score requirements, although past credit performance serves as the most useful guide in determining a borrower’s attitude toward credit obligations and predicting a borrower’s future actions. Using FHA’s guidelines, lenders will make a credit determination based on the merits of each case.”

In other words, lenders are free to ignore credit scores as long as an individual meets the qualifying standards required to get an FHA loan. Any credit score requirement is simply something that lenders have added to further qualify borrowers with one exception: If an individual has a credit score of 500 or lower than the applicant needs at least 10 percent down.

Having said that, let’s go back to that 670 average credit score. It turns out that the overall average is different from the average scores shown by home buyers and those who are refinancing. The details look like this:

___ The average credit score is 670.

___ The average credit score for homebuyers is 695.

___ The average credit score for owners who are refinancing is 662.

A lot of people of late have run into financial problems and maybe their credit score is not as strong as it once was. The conflict is that given low mortgage rates now is a great time to refinance for many borrowers. So why is it that borrowers who refinance are getting FHA mortgages with lower scores than borrowers who are buying?

Ah, glad you asked.

Let’s look at the logic of real estate financing. If I’m a buyer, especially a first-time buyer, lenders really don’t know me. You can bet that lenders are going to look at me with great care because they don’t want to be on the sending end of a foreclosure notice.

But if I’m refinancing the deal is different. Lenders know me. The FHA knows me. If you look at the streamline refinancing standards they say that an FHA mortgage borrower must be current. They don’t say anything about car loans or credit card debt.

This actually makes a lot of sense. Too many lenders look at an individual’s overall credit activities and argue that rates should be higher because of credit dings which are not remotely related to home mortgages. HUD, however, is most interested in someone’s mortgage payment history because the FHA is insuring mortgages and not something else.

If you have an interest in refinancing an FHA loan speak with lenders regarding specifics. And if you don’t have an FHA loan you might want to consider one.

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