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FHA Loans, Credit, and the Future Of Mortgage Lending

April 12, 2013


A recent article in American Banker notes that while the housing market is definitely trying to recover, many borrowers face a difficult time getting a mortgage because of high credit standards.

But the FHA and the Department of Housing and Urban Development are trying to work out solutions to this problem, one that according to the American Banker article by Kate Berry titled, FHA Working On Plan to Increase Lending, Reduce Banks’ Risk, would, “potentially release banks and mortgage lenders from liability for minor defects on FHA loans that meet current guidelines even if they ultimately default”.

One of the problems–one addressed publicly by both the HUD Secretary and the head of the FHA–is the need for financial institutions to expand access to home loans for borrowers with credit scores lower than what is traditionally accepted by many banks.

Banks could lower their credit standards on their own, but according to the Kate Berry piece for American Banker, there are fears of investigative oversight (or worse) from the federal government as a result.

But HUD Secretary Shaun Donovan has indicated, as early as his 2012 testimony before the Senate Committee For Housing, Banking, and Urban Affairs, that the FHA and HUD are actively seeking ways to encourage more lenient FICO standards without compromising the integrity of the lending process.

Donovan went on record in 2012, stating, “I think there is, beyond the market question, a question of how far do we go in visiting the  sins of the past on new borrowers. The premiums that are being paid by new borrowers more than cover the expected losses.”

Large participating FHA such as Wells Fargo and JP Morgan Chase have much higher credit standards than the FHA minimum of 580 with even low “thresholds” possible under the right circumstances–as low as 500.

There are plenty of financial institutions willing to work with borrowers who want an FHA loan but may have credit lower than they’d like to come to the bargaining table with, but some financial institutions are waiting for guidance from the FHA and HUD before taking action–that hesitancy seems based on a level of caution many feel is warranted in the wake of the housing crisis of previous years.

What’s the bottom line in all this for most borrowers? For now, it’s the knowledge that the FHA, HUD, and the mortgage lending industry all seem to be interested in making home loans available to more borrowers–many of whom are still trying to repair their credit after a very difficult period of job loss, home foreclosure, declining property values nationwide, and other factors. The borrower who got turned down yesterday for an FHA loan due to lower FICO scores could find tomorrow a much better time to apply for a new home loan and realize the dream of home ownership.

Do you have questions about FHA loans or FHA refinance loans? Ask us in the comments section.

Joe Wallace - Staff Writer

By Joe Wallace

Joe Wallace has been specializing in military and personal finance topics since 1995. His work has appeared on Air Force Television News, The Pentagon Channel, ABC and a variety of print and online publications. He is a 13-year Air Force veteran and a member of the Air Force Public Affairs Alumni Association. He was Managing editor for www.valoans.com for (8) years and is currently the Associate Editor for FHANewsblog.com.

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