FHA just came out with a new mortgagee letter describing the new changes on FHA loans regarding credit scores and LTV's (loan-to-value). Here are the changes : New updates for FHA Mortgages - Changes in LTV & credit scores - seller concessions?
Just the other day, I read this post,"Bending Over Backwards".. A simplified Version of the New FHA Credit Score Guidelines...by Karen Stone, that talked about these changes and laid out the credit score changes. It was this person's simplified version which was written by a realtor. It was well written and the outline was accurate, but it was missing critical explanations of what can be done and what can't be done. Sorry people, but in my opinion, this can be misleading for several reasons.
- Consumers reading that post will now search for a lender to offer FHA Loans with low credit scores.
- Realtors think that these loans now exist.
- A consumer might find a lender that says yes to such FHA credit score, but in which it will be very difficult to close that loan. 2 months later, the loan is denied when it was probably a dead deal from day one. This happens.
Jeff Belonger's cheat sheet for FHA credit scores based on what was mentioned in the Mortgagee Letter 2010-29. (changes in bold) Borrowers with....
Credit scores below 500 are not eligible for FHA insured financing. - Okay, not a total loss considering that we know anyone with low 500 credit scores will usually have many credit issues that will prevent them from getting a mortgage anyhow. Most lenders require a credit score of 620 or above.
Credit scores at 580 or above are allowed maximum financing for FHA loans. - Meaning that you can obtain FHA financing with the minimum 3.5% down with a 580 or above credit score. But be very careful of those that promise you FHA loans with credit scores from 580 - 619. They are much more expensive, anywhere from 1% to 1 1/2% higher in rate. And also come with 1 to 2 points more. Why not wait until you can get your credit scores up. They might woo you with a FHA streamline, telling you that you could refinance that high rate to a lower rate in six months. But they might make it sound easy, leaving out an important topic in regards to how the new formula works for FHA streamlines. The issue? In most cases you will need to bring closing costs to the closing table, that you won't be able to roll those costs into the loan. The other issue not mentioned. The lenders that I see off credit scores from 580 to 599 are requiring 10% down anyhow. It's a compensating factor for them to make that loan more sell-able. Just be very careful about what some tell you. In many cases, it's to get you in the door...
Credit scores from 500 to 579 are limited to 90% LTV (loan-to-value) - In my opinion, no worries here because I know of no lender even doing FHA mortgages with credit scores below 580 anymore. And again, in most cases, even credit scores in the high 500's will need some massaging before that loan could be approved.
Summary : I have seen some people write about FHA loans and even in a simplified manner. I just read a comment that some of these mortgage posts written by loan officers can put you to sleep. So should I leave out some details that need to be mentioned as insight. Yet dress up the post, make it sound fun, easy to read, and "simplified"? Sorry, but in my opinion, that kind of method is misleading. Why? Easy to read or not, there needs to be a more detailed explanation and not just that FHA loans can be done down to a 500 credit score. Or that you only need to have 3.5% down with a credit score 580 or higher. Why do I say this? Because if just written that way, it would sound like it could be done this way. Just because FHA allows for it, doesn't mean it can happen. Many lenders have specific "lender overlays". In my opinion, "simplified" or not, it has to be mentioned. Otherwise, as I mentioned, you will have consumers and or realtors thinking that this can be done and will actually waste their time looking for such lenders. Consumers and realtors need to be better informed.