FHA mortgage loans, which are insured by the Federal Housing Administration, are about to become a little tougher to get.
The FHA mission has been to support sustainable homeownership for borrowers with moderate incomes and less-than-perfect credit. Mortgage insurance premiums paid by FHA borrowers are meant to mitigate the risk for lenders of a default, making them more likely to approve a loan for a borrower with a low credit score and extra debt. The minimum down-payment requirement of 3.5 percent makes the loans attractive to first-time home buyers.
But now the FHA plans to tighten its guidelines to lenders because of concern that the agency has been supporting too many risky loans. New guidelines went into effect in March, and they could impact loans that are in the application process. If the loans are affected, some would-be borrowers could be pushed out of the spring market.
The risk trends identified by the FHA over the past few years include:
• Almost a quarter of all FHA loans in 2018 had a debt-to-income ratio above 50 percent, which means the borrowers spend more than half of their monthly gross income on their minimum payments on all debt, including their housing payment.
• More than 28 percent of new mortgages during the first quarter of 2019 had credit scores below 640 and more than 13 percent had a credit score below 620. The average credit score for an FHA loan fell to 670 in 2018, the lowest average since 2008.
• An increasing number of borrowers had credit scores under 640 and had a debt-to-income ratio of more than 50 percent.
• The number of FHA refinances in which homeowners took out cash in 2018, thus reducing their home equity, jumped by 60 percent in 2018.
The immediate change lenders will see is the automated system (TOTAL Mortgage Scorecard) may send back more mortgagees for manual underwriting. In 2016, the FHA loosened the requirement for manual underwriting for borrowers with credit scores below 620 and debt-to-income ratios above 43 percent. That loosening resulted in some of the riskier loan approvals, so revising the system is anticipated to result in fewer risky loan approvals.