FHA Lending Supporting Subprime Borrowers
There continues to be a lot of talk about FHA mortgage lending in the news. The housing sector continues to sputter and interest rates are rising. FHA home loans are government-insured mortgages that have supported much of the mortgage industry since the sub-prime mortgage crisis, may not be as affordable in the near future. FHA has pledged to raise insurance premiums in April and many approved FHA lenders are reporting higher closing costs and 3rd-party lending fees.
FHA loans are very popular with first time homebuyers and borrower who are unable to qualify because of 10-20% down-payments that are common with traditional loans. FHA is also the go-to loan for borrowers with less than perfect credit. The FHA loan requirements have always been more flexible than conventional mortgages until recently. Many lenders have announced minimum credit scores for borrowers seeking FHA home loans.
FHA requires at least 3.5%, while in most cases conventional mortgages typically require 10 to 20% more. Last November, lenders implemented minimum credit score of 500 and for borrowers that had credit scores below 580 would have to come up with a 10% down-payment.
Many non-prime and bad credit mortgage programs have been discontinued, but for many struggling consumers, FHA is the only chance to qualify for mortgage rate refinancing or home buying because of the flexible credit criteria. Wells Fargo recently lowered its minimum required credit score for a FHA loan to 500 from 600. The National lender also lowered their required debt-to-income ratio to 43%. For FHA borrowers with less than perfect credit, the Wells Fargo increased their minimum down-payment requirements to 10%.
Since the sub-prime mortgage crisis began in 2008, “FHA has been the only haven for borrowers,” said Sean Welsh, a senior loan officer at Campbell Financial Services in West Haven, Conn. But the agency’s capital reserves have fallen below levels mandated by Congress, which is why the rise in the annual insurance premium was authorized. Mr. Welsh said the increase, while “not too bad,” was still “additional pain” atop the November change.