Having a low FICO score usually means there is no way for you to quality for a FHA mortgage, but changes to the underwriting process August 2015 means that more borrowers may qualify. This blog summarizes news on New FHA Leeeway for Home Loan Approvals. According to some analysts of the new policies, up to 100,000 new potential borrowers may now qualify if you can convince underwriters that you can make the payments.
Loans based on FICO score
Since the sub-prime meltdown, mortgage loans to borrowers with FICO scores below 660 fell below $150 billion per year overall. This lower number of loan approvals, due to lenders shying away from lending to borrowers with scores under 640 resulted from poor lender performance reviews of higher-than-average loan defaults.
Neighborhood Watch System
To encourage more borrowing to the subprime market, the Federal Housing Administration made enhancements to their Neighborhood Watch Early Warning System to improve the performance of loans to borrowers with lower credit scores. The FHA hopes that more accurate assessment will improve underwriting processes to include other characteristics outside of FICO scores for determining creditworthiness.
The Fair Isaac Corporation (FICO), a company that provides software to assess an opinion on creditworthiness, developed a scoring system ranging from 300 to 850 points based on their specific formula. Access to your FICO score comes via the three major credit bureaus (Equifax, TransUnion and Experion). The FICO score, based on information each credit bureau keeps about you in your credit file, includes your credit history—loans and repayment, credit card usage, etc.—the age of your credit, and the types of credit you use. Your score can differ among the three bureaus depending on the information they have in their system about you. This is why it’s important to either monitor or periodically review your credit report, especially well in advance of applying for a major purchase or for a home loan. A credit consultant review will show you both incorrect or outdated information and give you valuable suggestions to improve your report.
Under the new system, FHA’s system for judging lenders changes to offer a more fair metric so that lenders to communities with a higher concentration of residents with lower than average FICO scores may offer loans without the fear of penalties simply because of where they focus their loan business. Borrowers falling into the potential new category include:
- Younger buyers
- First-time buyers
- Minority households
- Moderate-income working families
Potential buyers recovering from job loss during the recession when they were behind on paying bills may now have an opportunity to prove their creditworthiness despite their FICO score. These are the people with a reliable income, an ability to repay their loan and acceptable debt-to-income ratios.
While some lenders may wait to see how the new metrics will work, others may begin offering loans and programs to take advantage of the opportunity. If you’re hoping to buy a home in the near future, but have wounds from the recession, don’t count yourself out … shop different lenders to see if you can qualify under the new underwriting guidelines.
One-stop shopping for a mortgage by simply going to the bank where you’ve been banking for years is not be the best choice for your situation. Contact us for referrals of quality local lenders who may be more able to respond to your particular situation. A good mortgage broker will shop and compare for you to determine how to make use of New FHA Leeway for Home Loan Approvals.
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