FHA = Subprime? You’re Kidding, Right?!

by Gina Pogol
July 27th, 2010

I have to laugh at a recent post on Seeking Alpha, a blog I like and ordinarily have a lot of respect for. But they missed the mark with this one. The author pulls this statement from the FHA site as evidence that FHA loans are government-backed subprime loans.The emphasis is his.

“Why should you choose an FHA loan?

There are many good reasons to choose an FHA loan, especially if one or more of the following apply to you … If you have less than perfect credit: You don’t have to have perfect credit to get an FHA mortgage. In fact, even if you have had credit problems, such as a bankruptcy, it’s easier for you to qualify for an FHA loan than a conventional loan.”

If you equate the phrase “less than perfect” to cheesy advertisements for payday loans or secured credit cards, you may infer “subprime.” But this isn’t the marketing department talking, it’s the government, where “less than perfect” means exactly that. In mortgage-land, “less than perfect” credit could just mean a thin file, meaning a short credit history, a few medical collections that were paid off, or a late payment or two. Bankruptcy still disqualifies you unless it was years ago or not your fault, and you still need to have reestablished financial stability. And you have to prove your (stable, sufficient) income. That’s hardly saying that FHA insures loans to dirtbags.

FHA Borrower Credit Scores Have Increased

FHA borrowers’ credit scores have increased steadily over the last three years, from an average of 621 to an average of 693. Meanwhile, the scores of consumers in general have dived to the point that 25% of the population has scores of 599 or less, and only about a third of the population is at 650 or higher. Why has this happened? For a couple of reasons. First, conventional borrowing has become harder and more expensive to get, with extremely strict guidelines, elusive mortgage insurance, and risk-adjusted pricing “enhancements.” Second, FHA lenders have become extremely protective of their FHA approval, imposing higher-than-required credit score minimums to keep their default rate to a minimum.

So FHA is filling a gap, but it isn’t sub-prime. It’s what used to be considered prime before the mortgage collapse.

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