Real Estate News

FHA Said to Be Tightening Lending Standards for Some First-Time Buyers

Written By: Jaymi Naciri
Tuesday, April 9, 2019

ldquo;About 40,000 to 50,000 loans a year will likely be affected by the tighter underwriting standards, or about 4 percent to 5 percent of the FHA-insured mortgages originated annually, Keith Becker, the FHArsquo;s chief risk officer, told The Wall Street Journal,rdquo; according to Realtor Magazine.

The FHArsquo;s reasoning for the change: Anxiety over too many potentially iffy loans to buyers whose financial picture isnrsquo;t as strong as theyrsquo;d like. ldquo;The Federal Housing Administration told lenders this month it would begin flagging more loans as high risk,rdquo; said the Wall Street Journal. Loans deemed riskiermdash;namely, those for applicants with lower credit scores, a smaller down payment, and/or a higher debt-to-income DTI ratiomdash;will ldquo;now go through a more vigorous manual underwriting process.rdquo;

That new process is intended to identify borrowers ldquo;who donrsquo;t have the ability to repay,rdquo; said Bankrate. ldquo;That may lead to a jump in loan defaults that will tax the agencyrsquo;s cash reserves.rdquo;

And that could mark a return to conditions that led up to the economic downturn. ldquo;Borrowing requirements had tightened considerably after the housing crisis but have loosened in recent years,rdquo; said Bankrate. ldquo;In 2016, the FHA eliminated a rule that required manual underwriting for borrowers with credit scores below 620 and a debt-to-income DTI ratio that exceeded 43 percent, according to the Journal.rdquo;

But, over the last year, almost 25 of FHA loans ldquo;were made to borrowers with a DTI ratio above 50 percent,rdquo; they said. ldquo;Meanwhile, the average credit score dropped to 670, the lowest level in a decade, the Journal reported.rdquo;

Previously, applicants could reasonably expect to be approved for an FHA loan with a down payment of 3.5 if they had a credit score of 580. For scores below that threshold, a larger down payment was required. Applicants with lower credit scores could ldquo;put down a 10 percent down paymenthellip;to qualify for a loan,rdquo; said First Click Mortgage.

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