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HUD Pushing for Bad Credit FHA Loans?

January 13th, 2012

Is HUD Encouraging Lenders to Accept Lower Credit Scores on FHA Loans?

If you have poor credit and have been turned down from a mortgage lender recently their may be new opportunities coming with FHA loans because HUD is pushing for lenders to lower credit score requirements. The National Mortgage News reported that the Department of Housing and Urban Development, would like to see FHA lending sources reduce the FHA credit score requirements. HUD approves FHA loans with credit scores greater than 500, but many FHA lenders institute their own credit score requirements. Today the average score on an FHA-insured mortgage is 700.” This will be received with open arms from borrowers with low credit scores because the 30-year FHA mortgage rate has fallen in the 3.25% range again.

In order for FHA mortgage lenders to loosen their underwriting standards, changes to the FHA’s Neighborhood Watch program may be necessary.  Neighborhood Watch is a HUD program that monitors lenders to make sure that they aren’t issuing a lot of loans that end up defaulting.  It does this by comparing the default rate from a given lender to the average default rate for all FHA loans, regardless of credit score or other risk factors.  Default rates above the norm could set off audits or monetary penalties for potential losses.  This makes FHA lenders reticent to lend to people with lower credit scores or higher risk factors.

According to a 2010 USA Today article, over 25% of consumers had credit scores of less than 600.  This type of credit score would eliminate 25% of the population from qualifying for a low rate FHA home financing based on today’s lending guidelines. The Boston Herald published an article recently that indicated that between 2008-2009, 50 million people saw their FICO scores drop by 20 points, and 21 million of these people lost more than 50 points. Read the original article on Total Mortgage blog.

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