HUD (FHA) literally just announced that they are getting harder on higher debt to income ratios for lower credit scores. Now their announcement is vague but here is what I do know:
- Credit Scores getting Lower: The average credit score for FHA loans that closed in 2018 was 670. This is the lowest it has been in 10yrs. Already in 2019, 28% of the loans closed had a credit score under 640. 13% had a score under 620. So HUD believes the credit scores are continuing to decrease or at least do not seem to be increasing.
- Higher Debt To Income Ratios: in 2018 amount of loans with a debt to income ratio over 50% was 25%, this is the highest it has been since 2000! Already in 2019 the percentage is over 28%. FHA normally approves loans to a 55-56% debt to income ratio.
- Getting Tighter: For all FHA case numbers(meaning the loan started) ordered on March 18th and after, the automated approval system is going to get tougher on loans with credit scores and higher debt to income ratios. While they are vague on this, based on my research and thoughts it means credit scores of 640 or 620 and under with a debt to income ratio of 50%+ will have a harder time getting approved.
- What you need to do: First is go back and make sure any client falling in this situation is still pre-approved with their lender. Second, this change obviously hurts those buyer’s buying power, but what we need to do is focus on getting their credit scores up. This would include credit rescores to get the credit score a little higher such as 640+, to get them more buying power.
Do not look at this as being negative info, but rather FHA adjusting their underwriting guidelines so we can keep the program. Lord knows we need FHA loans!! Please call me with any questions and below is my video also breaking this down: https://youtu.be/LOOL0ZjQJT0