FHA Loans Are Getting Tight

For whatever reason, FHA loans are getting harder and harder to obtain. An FHA loan is simple to understand. The federal government determines the criteria that borrowers must meet, and as long as the borrower qualifies, the government will guarantee the lender against losses if that particular borrower defaults on the loan. If the borrower stops making payments and the lender needs to foreclose on the property, the federal government will step in and pay the lender for all losses on that loan. It’s the highest mortgage guarantee a lender can receive because the federal government itself is backing the loan. However, in the past few weeks, I have been hearing rumblings from lenders that banks are not accepting FHA loans in the same number that they have for the past few decades. WHY? I have no idea, but it is happening. Could these banks be worried that the federal government may not be good for all these loans if they go bad? That is the only reason I can think of. Why else would a bank make it harder than it has to be to get an FHA loan? See, the FHA does not lend any money. It just sets the guidelines that the banks and borrowers have to abide by to get the FHA loan. It’s up to the banks to accept FHA loans. Why would banks start imposing more than the minimum for these loans to occur when they have the federal government’s guarantee that they are insured against all losses on those FHA homes?

Here are the FHA guidelines, as I understand them, for borrowers to obtain an FHA loan:

• Debt/Income ratio at no more than 43%. This means that all debts, including future mortgage payment, cannot exceed 43% of that borrower’s gross income.
• 3% down payment, which can be gifted.
• The actual property must meet a minimum standard for occupancy, meaning the home cannot need serious repairs and should be up-to-date on a lot of different things that I’m not going to go into here.
• No outstanding delinquencies or back child support or judgments on credit score for 2 years. Regardless of how “bad” your credit score is, the government will still back your loan at a great rate as long as your credit has been clean for 2 years. That’s a pretty good deal!
• No minimum credit score required. However, if a borrower seeks approval for a higher debt to income level (up to 50%), then a credit score would be used by an underwriter to determine if this applicant has had a good history of paying debts. Assuming a 625+ FICO score, most underwriters would ok a borrower all the way up to a 50% back end debt ratio.

(See picture below for further guidelines.)

NOW ALL THOSE ITEMS STILL APPLY… AND

Just about all banks have now upped the minimums for which they will lend their money, even though the federal government is giving them a foolproof guarantee.

From what lenders are telling me, borrowers will now need a minimum 550 FICO score to be approved for FHA financing! And this guideline will probably get tougher as time proceeds. Some banks are now looking for a minimum 580 FICO score.

Who knows where this will go. Maybe the credit crunch is just too tight, though from what I understand, it is starting to ease. The lenders only have so much cash available to lend, so naturally they want only the most qualified to be able to access it. They don’t want to get into a situation where too much money is going out and not enough is coming in, making them insolvent. That is a banker’s worst nightmare and is what occurred most recently to Bear Sterns.

This entry was posted on Friday, April 18th, 2008 at 3:17 pm and is filed under Financing. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.