FHA tightening mortgage underwriting standards as credit scores decline
Douglas Elliman's Noble Black on the state of the housing market and Gov. Andrew Cuomo, D-N.Y., advocating for a permanent two percent property tax cap.
The Federal Housing Administration (FHA) is cracking down on riskier mortgages.
The agency will put a larger share of mortgages through a more strenuous, manual underwriting process, after telling lenders earlier this month it intended to identify more loans as high risk.
Lower-income people tend to turn to the FHA for assistance because it has offered as little as 3.5 percent down for those with a credit score as low as 580 – while lenders for a traditional mortgage prefer a score in the 700 range.
The changes are effective for mortgages with case numbers assigned on or after March 18 and are being made by the FHA to address some concerning trends bubbling up in the market, which have led to an “increase in higher-risk credit characteristics” within its portfolio.
In 2018, the FHA insured more than 1 million mortgages for single-family homes. Meanwhile, the average FHA-borrower’s credit score declined in 2018, to 670 – the lowest level since 2008. Credit scores have continued to decline so far this year and have been on a downward trend since fiscal 2011.
According to the FHA, more than 28 percent of new forward mortgage endorsements in the first quarter had credit scores below 640, while 13 percent had credit scores below 620 – a nearly 19 percent increase over last year.
Additionally, the agency noted a growth in cash out refinancing in fiscal 2018, which is when a larger mortgage loan is taken out on an existing mortgage, and the borrower takes the difference between the two in cash.
More than half of FHA-insured forward mortgage purchase transactions during the last fiscal year were comprised of mortgages where the borrower had a debt-to-income ratio above 50 percent – another troubling trend that has continued into the current fiscal year.
Further, there is an increasing number of instances where borrowers have both a credit score below 640 and a debt-to-income ratio above 50 percent.
More than 37 percent of FHA purchase mortgages in 2018 involved down payment assistance.
The FHA said it will monitor the impact of the new changes and is prepared to implement additional reforms as it seeks to strike a better balance between managing risks while supporting sustainable home ownership.
In 2016, the FHA loosened its standards, saying it would no longer require manual underwriting on mortgages with credit scores below 620 and debt-to-income ratios above 43 percent.
There are concerns the reversal could keep some borrowers from obtaining financing from the agency.
About 83 percent of the mortgages insured by the FHA in 2018 were first-time buyers.
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And despite challenging conditions – including high prices and a lack of inventory, more millennials are hoping to become first-time home buyers as they approach their late-20s and mid-30s. In fact, 21 percent of people between the ages of 18 and 34 said they planned to purchase a home in 2019, according to Trulia, compared with 14 percent last year.
Many young Americans, bogged down by mounting levels of student loan debt, have had a hard time mustering up the finances to purchase their first home.