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Credit Scores CHANGING now on FHA loans?......... Opinion OR Fact???

credit scores changing

The British are coming, the British are coming. Okay, so that was over 200 years ago. But now, it's the credit scores are changing, the credit scores are changing.

Just in recent days, I have been reading and hearing a lot about the mortgage industry changing the credit score requirements, AGAIN.... But didn't we hear about this about 6 to 12 months ago? We went from most lenders doing down to a credit score of 500 to then a change of not going below 580. Now... some lenders are changing the score to 620. Now, don't panic.

Sure, it's already happened with some. But just as leaves change in the fall, not all leaves change color. Some still stay green or a different shade of green. I believe the same will be with credit scores aka fico scores. I don't think this will be across the board.

One of the major investors and lenders, Wells Fargo, just recently changed their FHA credit score requirement to 620 or above. Ouch.... This is not good news because a few other lenders have done this and more are probably going to follow. But wait.... FHA doesn't really have a credit score policy. Sure, you can go below 500, but you have to have 10% down or a 90% LTV if refinancing. The questions would be to find a lender that can do this. I knew of a few, but not any more. I can still go down to a 500 credit score, but the rate isn't pretty. Which gets me back to this whole discussion.

Jeff, the FHA Expert.... what do you think about this?

Well, my opinion... and let me phrase, my opinion. Because just about everything else that I am reading, sounds like fact, when it is actually of that author's opinion. Hey, opinion is fine, but make sure you let people know this. Just as I have had to explain to clients that call me up and say... "well, my previous loan officer told me that he can't help me, because everyone needs a 580 or higher."

Answer.... "well, Mr. & Mrs. Borrower.... there are only a handful of investors that will allow for credit scores under 580. These FHA loans are still doable, as long as they can be insured. And in FHA's mortgagee letter 2008-16, it actually states the breakdown and you even see a chart that goes down to a 300 credit score. Do you know that you don't even need credit scores and can use non-traditional credit. And investors still allow for this."

Summary : Do we need to be careful, educated, and be prepared? YES !!!! DO we need to alarm everyone as if the end of the world is taking place? No, plenty of people have been doing that already.

Can credit score requirements raise? Go higher? Yes, it's already happening. But as mentioned, as long as HUD will insure these loans, it is the investor that can change these requirements. It basically comes down to someone, an investor on Wall Street, that will buy these loans. Just as there are still a few that will buy down to 500 and to 530. How much longer will that last? Not sure... But we at Infinity Home Mortgage Company, Inc are already looking at options, to make sure that we can always help any type of borrower. I'll be talking about this possibly in weeks to come, so stay tune. But just remember this, this is not a fact, it's of opinion. And so is everything else that you will be reading about credit scores. Just make sure that you deal with a true mortgage professional that can explain all of this to you in detail. thanks

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Posted by Jeff Belonger -- The FHA Expert.com -- FHA Loans -- FHA mortgages - USDA loans on 01/24/2009 12:34 AM

Comments (32)

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Originally posted at: FHA Mortgage Expert - Tri-State Area - New Jersey/PA/Delaware: Credit Scores CHANGING now on FHA loans?......... Opinion OR Fact???

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32 Comments on Credit Scores CHANGING now on FHA loans?......... Opinion OR Fact???

JAN

Banks are having a hard time finding PMI companies to insure properties so credit score requirements have to go up. If the bank can not get a loan insured they can not fnd a loan with less than 20% equity. Drastic times call for drastic measures. I hope we see the end to this credit mess soon.

Thanks

Jeff - this is great info as always - I had heard about credit score limits changing but always depend on you and other great money folks for the truth

DAWN..... . well, that is for conventional loans. FHA loans are different. Yes, they have mortgage insurance, but you don't have to follow PMI guidelines that are for conventional loans. thanks

THESA.... . thank you very much for the kind words. Yes, credit scores are changing... but not with every lender or investor. I am just getting tired of reading opinion that is stated as a fact. And we need to educate... thanks

The world is ending, the world is ending. December 21st, 2012... the world is ending!

Jeff - With the concept of opinion versus fact, you are right. And it does depend on the investors. I will say though, I believe (in my humble yet significant opinion;) the majority... if not all... investors will eventually follow suit in regards to the 620 credit score. I don't think that it will be chronic, but a temporary knee jerk reaction to a lending atmosphere that is just a tad "quirky" for lack of a more articulate explicative. You've been at this gig longer than I and I've spoken to folks who have been at this longer than both of us... some think the same as me and some think the same as you.

Personally, I'm tired of Mortgage Insurance Companies and Credit Reporting Agencies controlling the lending atmosphere, as it certainly appears that they are doing just that. Interesting times to be in the lending industry, I knew I should of been a postal worker;)

Manual UW is still available down to a 550 with LOX on credit. I think we will see the trend of FHA becoming harder to qualify for.

Good post

Now I guess that while FHA does not have a credit score requirement it does look at credit history. Bad credit history= low credit score. So while the intent is not to lose a mortgage over a point or two (we have all seen this with pricing) it does display current past payment trends

Tony

Jeff I just wanted to say that it is always eye opening to read your mortgage posts. As you know I am a strong proponent of lenders doing their thing and realtor's doing theirs. What i enjoy aout your posts is your ability to make sense of the lending process in a way that is easy to understand and also helps me answer my clients questions in a general way. The lender is the authority but it helps to understand the process that buyers are dealing with on a better level.

Great post, Jeff! And we all need to pay our bills on time to keep those numbers as high as we can!

Great info, Jeff. But then aren't the requirementa always shifting? Seems that way to me. What about the new scores they have been talking about.

PAtricia - how true. But I keep hearing stories from folks who are opening their credit card bills to finid their limits driopped to where their formerly less-than-30%-of-max balance was. And not they are maxed out. So how do you combat THAT behvaior on the part of the banks?!

Jeff - any thoights?

Jeff

Jeff—Lenders don't have any choice except to raise the numbers on qualifying credit scores due to the increased risk of doing busness in today's depressed market. Money is a commodity just like salt. Thus those that have money to lend/invest control the price of the money they lend. These investors want to know they will get a return on their investment. This is a fundamental we need to understand. Great post.

Probably get a litlle worse before it gets better.

I have now read yours, Jason's and Eleanor's post on this subject. I my opinion you are all probably right from the perspective from which you approached the subject.

I seems to me the large lenders are imposing their own restrictions due to manufacturing quality concerns due to the scope of their operations.

The smaller lenders may lag behind, as they have greater control simply because they have less underwriters to manage.

The issue comes down to getting the loan insured. Larger volumes pose larger risk. So we see internal control.

The problem may arise for smaller lenders in that they may end up seeing a disproportionate share of marginal files. Forcing them to institute tighter internal controls.

Not based in fact, purely opinion.

Jay

JASON..... . my initial bigger complaint was that some of what I am reading doesn't state that it's the authors opinion and it certainly sounds factual. That is how rumors start and how misinformation spreads.

In regards to what will happen in the near future. Just as we have people longer in the business that give advice on rates and should they lock or float, even they are wrong at times. Both the rates and the credit score issues in my opinion is a flip of the coin. Sure, I can base my opinion on experience, but I also base it off of the past and what has happened. As you can see, you can still get loans done under 580. And most lenders will even do them under 580 if you have an Approve/Eligible or an Accept/Accept. And we just got one approved in LP that had a 575 score. So there is another piece that I didn't include in my post. I would bet the house that even if lenders go to 620, that they will allow for under 620 with an automated approval. And I can see this happening, because it makes the investor feel a little bit better.

Overall, I am just tired of opinion sounding like fact, because people that follow those people, trust those authors, are getting misinformation and opinion. And all you need to do is throw in the word opinion... and that has been a pet peeve of mine for a long time. thanks for your input...

LAURA..... . that all depends on your investor or lender. I can still go down to 500 on a manual underwrite. But you need more than a letter of explanation. The deal still has to fit FHA's credit guidelines and yes, there are expectations, but they have to be damn good and documented. And with compensating factors... thanks

TONY.... . yes, you are 110% correct, that there are current and past credit trends that can greatly affect someones credit scores. And sure, there is a lot of data out there that supports the 620 or higher credit score. But I guess it comes down to how you look at each borrower and how you underwrite them. If I have borrowers that had bad credit over 2 years ago and low scores still... but there was a good reason and that they have been good.... these people should be given a chance. But we have to massage that credit and those scores to make it work now... and if everyone raised them to 620, you will see the housing market crumble.

RUSSELL..... . wow.... not sure what to say... thank you very much for those kind words and the for the thoughtful comment. I truly appreciate it. I guess how I view things when writing is that I want to put the best possible information out there, but in the easiest terms to understand. I don't want to be the Dennis Miller of Monday Football. He had many lost on his words alone. Again, thanks for the polite compliment.

PATRICIA.... . sure we need to pay our bills on time to keep the scores high... but things happen and some things that we just can't control. Thanks for the compliment.

JEFF D. .... . sure, things are always shifting and changing, especially in the mortgage business. And even more than ever in the last 12 months. And we need professionals to keep us in the loop... but we need to make sure that we make it clear, what kind of info that it is, whether it be fact or opinion... yet state it as that and not the other. thanks

LINDA..... . yes and no... they do have a choice. And as I mentioned to Jason, even if they raise them to 620, I would bet that many investors would allow for under 620 with automated approvals. and sure, investors want to know what they are getting on their investments. But do you know how many people have just average credit even with 650 credit scores? I am the kind of guy, if it makes total sense, you can document things, and have compensating factors, that it's a good deal. Just that fate sometimes throws us a curve ball from time to time. thanks for the compliment.

TOM..... . sure.. and that's easy to say.... but will it just stay worse for a longer period of time? Didn't some of use say this when the scores for many went to 580? One thing for sure, time will tell. thanks

JAY...... . sure, in opinion... but I read stuff out there that came across as fact and I just don't agree with that kind of writing style, no matter who it is... no matter how nice they are... no matter how good they are at their job.

I think it will be a seesaw amongst large and small lenders... sure, quality is what they want. But as mentioned, if the loan can be insured, which HUD has layed out the ground rules, I believe that there will be investors that will still do these under 620. We still see this with the 580 credit score cut off. When did it change to 580 for many... back in April? May? Time has flown... but my point, there are still some that allow down to 500 and to 530. Sure, will this increase to 580 when most go to 620.. a very good possibility in my opinion... ;o) thanks for your input.

Interesting information Jeff. I heard our own office mortgage guy was commenting that the paperwork requirements were becoming onerous for deals he was working on, going from maybe 5 or 6 things to 15 or more.

Jeff, Your pitch or dialog to the borrower sounds pretty much he same as always. The industry changes often and recently has been a moving target. The best LO's know this and adjust how they inform borrowers. It is all about dealing with the facts. Not everyone can get a loan, but over-reacting is a guarantee that you won't be closing one anytime soon either. Your focus becomes blurred and you end up chasing the wrong goals when that happens.

It has been said to me that changes would be happening on throughout years to come but hasn't this been the case anyway? Is it on a wider range now? Loans, credit ratings, fica scores and FHA has always been confusing to me. Articles that put things into prospective are fabulous pieces of information.

NICK..... . thanks... I would be interested to know what your inside guy is talking about. The basics paperwork for me has been the same in the last 2 years. If he is a broker, he is dealing with other underwriters that might just not want those deals and make it tougher on him and his clients. We underwrite our loans in-house. We have more control and take the risk ourselves. This is becoming a bigger difference in the lending world now. Brokers in many cases are having a much more difficult time than we are, even though it's still rough for all of us out there. thanks

BO..... . is that good or bad? lol Yes, as many of us have mentioned, the industry has been changing and sometimes often. And you are correct in saying that the best loan officers can usually adjust to this. We need to stay one step ahead or to pick our niches. And yes, I feel some are over reacting on this topic. Sure, I could be wrong that every lender will go to 620, in my opinion, I don't see that happening. thanks

ROBIN GREEN.... . first off, why does your name sound familiar? Did you just contact me recently or comment on another blog? In any case, yes, things have been changing and will continue to change. But it's how we put those changes out there. Hence why I decided to write about this. The changes taking place with credit scores is a fact. The misleading fact is that it's not guaranteed to be across the board. As mentioned, some lenders can go below 580, when the majority of the industry changed it to 580. thanks

Float;)

Jeff,

Great job. When I got an e-mail about the very same subject, I immediately equated it to manufactured homes. Yes, loans still exist for these properties, you just need to find a lender willing to do it. It's a matter of "lender preference" - not because HUD won't do them.

Thanks again!

Maryellen

Jeff-

Great information! I'm sure we will see this credit tightening last for at least a few years.

Jeff,

good info as always, we should talk someday for the fun of it:)

A good follow up on this post would be the other side of fence for FICO scores.

A good credit score doesn't mean you qualify either. Had a lady in my office last week that thought she was a given for an FHA with her 583 mid score. Problem was, she had NO good credit, it was all collections.

She was not happy when I started talking about paying off collections and credit repair.

Drew

"The British are coming, the British are coming."

... now you got me all excited for a second there ...

Another important post ... and another reminder of the critical nature of improving your credit score.

Cheers !

Sheldon

JASON.... . what, you are floating that 3.5% fixed rate? lol

MARYELLEN..... . what e-mail was that? Yes, it does come down to finding a lender that can do it based on the credit scores. I just believe that even if the majority of investors go to 620, that there will still be some that will stay at 580 or even below that. In any case, thanks for the compliment.

JB.... . yes, I am sure of that... it has already happened... the question is, how much further or worse... thanks

DREW..... . yes, we should.. maybe in February, because the last week of January is booked for me. In regards to the client with the 583? I wouldn't really call that a good credit score to qualify... but I know your point. And I have a 3 buyers right now that it will take 4 to 6 months to get their credit on track to buy. And 2 of the 3 actually have above 580 credit scores. But it's not FHA worthy in regards to credit. In any case, thanks for the kind words.

SHELDON..... . lol... thanks for making me laugh.. And what's funny, I actually thought about you when I typed that in. How funny. In any case, thanks for the compliment.

JAN

Jeff,

Good subject matter and flow of comments and opinion. I believe that there are a number of reasons for a variance in the threshold for credit scores, some not always readily apparent to us as originators. Of course there will always be that flight toward quality and often knee jerk reactions. Sometimes it's just follow the leader. But most often it comes from an internal evaluation of the performance of their respective portfolios, loss and delinquency trends, etc. FHA lenders and their D/E Underwriters track records are scrutinized very closely by FHA/HUD as well as those secondary market investors that they sell to. So part of this is the trickle down effect. If the FHA lender and/or DE Underwriter is getting their hands slapped for "stretching the envelope" then they will tighten up to address these things to protect their licensing and preserve or maintain their relationships in the secondary market.

One manual underwrite file with 550 scores reviewed by 2 separate D/E Underwriters can produce totally different outcomes and maybe for different reasons. Likewise, if any two lenders portfolios of manual underwrite/substandard scores are laid side by side for comparison and evaluated for performance, loss ratios, etc, there may be a drastic difference in the way their respective portfolios perform. Obviously this all boils down to the quality of their DE Underwriting Staff. There are great 550 or manual underwriters and of course, the not so good.

Jeff - Great post and nice summary. It is important for consumers and especially realtors to know the facts about credit scores and some of the details. Ultimatelly it is great having a mortgage pro like yourself that can go over all the options with the consumer. Most Realtors do not fully understand the system and they may think that someone is not mortgable at all which is not true due to the benefits of FHA. ~ Chris Somers

RON..... . excellent comment with much needed information. This is the stuff that I would love to put into my blog, but I am trying to keep them somewhat shorter, to keep the readers interest all the wy through. The biggest thing that people don't realize is that the DE underwriter's performance and the lender's performance is watched closely. Hence keeping FHA mortgages in check. But everyone keeps forgetting about the unknown element of the economy... things happen in life.

Overall, yes, we even closed a few loans under 500 in-house, because they made sense... and our investors bought them. Yes, the basic credit scores do usually tell the history and what kind of credit risk that client is, but not always. Thanks for you in-depth comment...

CHRISTOPHER..... . I don't think many realtors and many loan officers understand the system... may it be about mortgages, credit, etc, etc. And giving opinion is fine, but not making it sound factual... hell, that is one major reason why so many people think positively or negatively about what you can do and what you can't do... misinformation. Thanks for the kind words...

I'm with Jason - if you're out past Valentines day Float.

FYI only - Countrywide Joins Wells on Monday with the 620 rules...

Jeff,

The e-mail I got was from a AR contributor who, actually, puts out a lot of good information. I just found this one a little odd.

Have a great week!

Maryellen

JAN

hey jeff, this is great information, I never knew that the more you put down, lets say 10 or 20 percent that this could help if you have a low fico score, great blog thanks

MAR

Jeff...Your knowledge is so helpful....

Jason Sardi.....I have a POSTAL contract and I am still having a hard time getting financed for FHA with a 580 score....lack of credit....people are not calling back....in need of a broker willing to put in the time for this solid move I want to make....so postal is so so....LOL

This site is so informative, have a great day all!

From the Florist/Post Office in Maine called Maine Floral Creations

Nicole Martin

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