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Mortgage lenders adding stricter requirements to FHA guidelines

by Karen Lawson
November 21st, 2010

Bloomberg reports that some FHA approved lenders are adding stricter requirements to those already established by FHA for its home mortgage programs. Common sense would seek to dictate that if FHA lenders underwrite mortgages according to FHA requirements, and mortgage servicing companies take care of customer service and loan administration duties as required by FHA, there shouldn’t be any justification for upping the ante  on FICO credit scores required for FHA loans. But that’s common sense, and in recent times we’ve seen all kinds of phenomena in mortgage loans and housing markets that don’t make much sense.

Deals on homes and mortgage loans, but you can’t qualify for a mortgage

Given high unemployment rates, foreclosures, personal bankruptcy filings, and underwater mortgage loans,  it’s difficult for buyers, sellers, and mortgage lenders to find themselves on the same page. FHA, an agency of the US Department of Housing and Urban Development, is taking on an increasing role in US home lending. Some reports indicate that the agency now backs approximately 40 percent of US home loans; this gives FHA both the power and responsibility for establishing functional and fair home loan standards for the foreseeable future.

FHA Loans: Investor overlays provide potential for inconsistent FHA loan approvals

Underwriting home loans is typically done according to criteria established by mortgage lenders or investors (conventional mortgage loans), or the federal government (VA and FHA home loan programs).This means that mortgage loans should be approved according to a conforming set of mortgage loan approval requirements. Doing otherwise is asking for trouble, as FHA guidelines for credit scores may be adjusted by one FHA approved lender, but not another. This provides inconsistent access to FHA loans by borrowers who don’t qualify for conventional mortgage loans.

Mortgage lenders began requiring higher credit scores than FHA required in early 2009. FHA requires a minimum FICO credit score of 580 to qualify for an FHA loan with a 3.5 percent down payment, but several lenders arbitrarily increased the minimum credit scores to 620. Now some lenders are requiring FHA borrowers to have minimum FICO scores of 640 . According to FHA commissioner David H. Stevens, raising minimum required credit scores to 640 may exclude as much as 15 percent of otherwise eligible FHA loan applicants.

In times when housing prices and mortgage demand are hitting rock bottom in many markets, it would be appropriate for HUD/FHA to insist on FHA approved lenders underwriting FHA loans using uniform FHA criteria. In other words, a minimum credit score of 580 would provide an otherwise qualified borrower access to an FHA home loan with a 3.5 percent down payment. Allowing more buyers to qualify for home loans by underwriting to FHA guidelines could inject some action into sagging housing markets.

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One Response to “Mortgage lenders adding stricter requirements to FHA guidelines”

  1. Shannon Says:

    I am currently in underwriting and have been asked to have 2 mos reserves after closing which I understand is NOT an FHA requirement. I think this is because of my elevated DTI. They also asked me to pay off my car. I get that because it lowered my DTI but I only had 8 mos of payments left anyway. Without the car, I would have a front end/back end of 38/41.2. Clearly the vast majority of my debt would be mortgage. Is this overlay fair?

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