Are FHA Loan Standards More Lenient Now?
According to an article in the L.A. Times, the answer is yes. There are many news sites and financial writers discussing the fact that average credit scores on FHA mortgages has “declined steadily”.
Some have noted an additional trend towards higher debt-to-income ratios among eligible borrowers--those who have had FHA loans approved. These things seem to be indications that lenders may be easing their standards in the wake of housing market recovery and other economic trends.
For some time, the minimum credit score participating lenders have tended to approve (specifically for an FHA mortgage loan) ranged 620 and 640. Now with these reports of some lenders approving FHA mortgages with scores at 600 (a FICO score well within the FHA guidelines for loan approval according to the rules in HUD 4155.1) the lending environment has gotten friendlier to borrowers with credit scores in this range.
The L.A. Times article mentioned above states, “The FHA theoretically allows credit scores as low as 580. But lenders, buffeted by defaulted loans and demands that they buy back troubled mortgages that they sold, generally have set standards higher since the mortgage meltdown.”
It is important to point out that FHA borrowers with lower credit scores may not have access to the same kinds of competitive interest rates those with outstanding FICO scores do. But the FHA’s low down payment requirements can make up for some of that compared to the down payments needed on many conventional mortgages.
Down payment rules for FHA loans require a minimum 3.5% down. Compare that to the down payment of as much as 20% on conventional loans.
FHA loan applicants should always compare rates and terms with competing lenders to try to get the most favorable terms on the loan or refinance loan. If you’re looking for a refinance loan on your existing FHA mortgage, remember that borrowers are not required to refinance with the same lender that issued the original loan--that can help some borrowers out a great deal when looking for better rates.
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