FHA mortgage loans are extremely important to the real estate industry. The FHA insures, on average, 30% of all mortgages in the US. Something like 70% of all first time home buyers use FHA loans. As a result any change, no matter how slight, in FHA policy is big news.
The FHA announced new credit requirements for mortgages on October 4th. The bar has been raised for home buyers. Buyers must have at least a 580 credit score now to get a 3.5% down loan. Home buyers with FICO scores of 500-579 must have at least a 10% down payment. Credit scores less than 500 won’t get a FHA loan. You’re simply out of luck.
The up front mortgage insurance premium was reduced from 2.25% to 1% and the limit on annual premium increases was raised from .55% to 1.55%
Some people criticized the FHA for making it tougher to get a loan. Steve Bergsman is a free lance journalist. He wrote an excellent article on these changes for Inman News. He quotes an expert as saying that while only 2% of all FHA borrowers have FICO scores under 580, 27% of them default. Ouch!
I believe that what should be criticized are the wide FHA mortgage ratios allowed. What about allowing up to 55% of your gross income to qualify for a FHA mortgage? I think that’s a disaster in the making. How can it make sense to spend close to 75% of your take home pay on your mortgage? That’s how the 55% works out. Because of these wider ratios more defaults are possible.
Emi Kalici is our Weichert Financial Services mortgage banker. Emi feels, as I do, that what the FHA has just done is irresponsible. She said that WFS has a better way.
Weichert Financial Services is a licensed FHA underwriter so we can be more relaxed with FICO scores for our Weichert buyers. This is a whole lot better for financially able people than widening their ratios recklessly.
It’s important to remember what created the financial crisis. The crisis came from irresponsible credit. Weichert Financial is right because widening ratios is wrong.