Underwriting standards appear to be loosening for FHA loans according to a new report from credit developer FICO. The report indicated that borrowers with FICO scores dipping down into the 400s rose from 21.9% in 2009 to 29.7% in 2017.
The FICO score is one of the standard measures of consumer credit risk in the United States and has been in use since the mid-1950s. FICO stands for “Fair Isaac Corporation.” Freddie Mac and Fannie Mae have used FICO to identify American consumers qualified for mortgages since 1995. FICO scores may range from 300 to 850.
FHA lending is leading the way toward more lenient credit standards according to the report. First-time buyers who made home purchases between January and March of 2018 had an average credit score of 672. In 2011, buyers who made purchases during the first quarter of that year had an average credit score of 701. The FHA is also permitting higher debt-to-income (DTI) ratios lately. The ratios include monthly household debts on credit cards, auto loans, and personal loans exceeding 50 percent. Five years ago, by comparison, only about three in every 25 FHA borrowers had DTI ratios that high.
Why is the FHA Changing the Rules?
Other entities like Fannie Mae and Freddie Mac are not easing their underwriting standards, why is the FHA easing up? The reason may be at the center of many present housing discussions: housing affordability. Millions of “would-be” buyers have found themselves unable to become homeowners in the wake of the mid-2000s housing crash, according to a study from the Urban Institute (UI)’s Housing Finance Policy Center. In fact, those researchers estimated that 5.2 million mortgages are “missing” just between 2009 and 2014. Those mortgages would have been made if the lenders in question had not stuck to post-recession credit criteria.
The FHA’s new leniency could be a move to lower the barrier on homeownership. This is especially true for new homeowners such as millennial and generation Z households, who were not old enough to make home purchases during the housing crisis.
0 Comments