FHA Loans: Are Credit Scores Important?
July 28th, 2010
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FHA has announced plans to require a minimum FICO credit score of 500 for borrowers to qualify for FHA loans. Although this requirement isn’t likely to begin until sometime in 2011, the decision begs the question of whether establishing the low minimum requirement is necessary. There are two ways of looking at this; the first is that the minimum required score of 500 isn’t going to change things for many would-be borrowers of FHA loans; during the second quarter of 2010, no FHA loans were issued to those with credit scores below 500; one percent of FHA loans were approved for those with credit scores below 580, and the majority of borrowers receiving FHA loans had credit scores of 620 or more.
FHA Guidelines: Credit Scores no Substitute for FHA Underwriting Criteria
Imposing minimum credit scores could encourage some lenders to gloss over underwriting requirements once they establish that credit scoring requirements are met. Although unlikely due to increased enforcement of underwriting requirements by FHA, it’s worth noting that a number alone cannot account for one’s financial circumstances in today’s uncertain economy. The traditional missions of FHA are providing opportunities for home ownership to under-served families, and offering affordable home financing programs during challenging times. Although FHA must balance its policies to minimize risk while achieving its missions, accurately evaluating borrowers’ ability to pay a mortgage loan should continue to depend on verification of employment, assets, and allowing applicants to explain gaps in employment, or reasons for previous credit problems. Here’s why.
Economic Downturn Impacting Consumers with Good Credit Scores
The economic downturn has caused many Americans to lose longstanding good to excellent credit scores.
- Under-employment and multiple job changes between career opportunities are compromising borrowers’ ability to meet underwriting requirements of two years’ steady employment with the same employer.
- Small business owners are struggling with losses of income and credit restrictions; lack of cash flow causes businesses to close and/or lay off employees.
- Loss of medical coverage: The high cost of health insurance is causing many employers to eliminate benefits. Many who lose their jobs cannot afford COBRA insurance premiums, and anyone with a pre-existing condition either can’t afford or cannot get approved for individual health insurance. One accident or illness can bankrupt a family without health insurance.
FHA should consider these and other circumstances when evaluating mortgage loan applications; If circumstances beyond borrowers’ control cause his or her credit to crash, shouldn’t these borrowers be given a chance to rebuild their financial security with an affordable fixed rate mortgage loans at today’s low rates?
FHA guidelinesare inclusive and accessible to many who cannot qualify for conventional home loans; as the FHA marketet share of purchase mortgage loans and refinance mortgages grows, its policy decisions will have increasing influence over housing markets and mortgage lenders.
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July 30th, 2010 at 9:17 am
Job and history of paying mortgage on time is more important than a score. Besides, I run into so many people who’s credit scores are beat up because of measly $15 medical collection that the borrowers didn’t know about.
July 31st, 2010 at 9:43 am
Let’s consider this scenario: You have purchased a home with private lending sub-prime hard money, all the documents are properly recorded. Due to present economic conditions, you fall behind, home falls into foreclosure, and you file BK. The mortgage is included in the BK, the automatic stay is lifted and the foreclosure concludes with the private mortgage holder now owning the property. You commence repairing your life after the BK while saving for a home of your own again. Those in the know all tell you that you have to wait at least two years after the BK before you are eligible for any type of mortgage financing. When you evaluate your credit report with a mortgage broker in anticipation of purchasing your own home again in the near future, you are told that according to FHA financing “rules” you are unable to qualify for FHA financing until FIVE (5) YEARS AFTER the property sells because the mortgage from the private lender was never reported to the credit bureaus (it’s apparently too costly for private lenders to report). So, the private mortgage company that did not report the mortgage continues to mess with your credit for five years after the foreclosured upon home is sold. That’s just not right! Is there anything that can be done in such a situation? Please advise.