The Department of Housing and Urban Development (HUD) announced this week that they are rethinking the way they evaluate mortgage lenders and borrowers, where risk is concerned. Their initiative could make it easier for people with bad credit to qualify for FHA loans later in 2015, and into 2016 as well.
HUD is the government department that oversees the Federal Housing Administration (FHA). It is HUD that establishes all rules and guidelines for this popular mortgage-insurance program, including credit guidelines. An FHA loan is different a regular or “conventional” mortgage because it gets insured by the federal government. This insurance shields lenders from losses that result when a borrower stops repaying a loan.
A New Way to Evaluate Lenders and Borrowers
On August 10, 2015, the Federal Housing Administration explained it was planning to use a new process for evaluating the FHA lending practices of HUD-approved mortgage lenders. In short, they want to learn more about the borrowers who are being served by these loans and the long-term risks they bring.
The FHA’s new “Supplemental Performance Metric,” as it is know, will give the agency more insight into lender and borrower performance while encouraging lenders to serve eligible but underserved home buyers and mortgage shoppers.
This follows other HUD initiatives (like the “Blueprint for Access” announced last year) that are designed to increase access to FHA financing for borrowers with credit problems in the past. These are important advancements because they could affect a large segment of the populace.
FHA Loans for People With Low Credit Scores?
People with credit problems in the past often have a harder time qualifying for FHA loans. But HUD is hoping to change that to some extent — specifically for borrowers who have reestablished a pattern of responsible credit usage.
Credit scores are just one part of the decision-making process used by mortgage lenders. But they’re an important part. In fact, a bad credit score by itself could potentially derail a person’s chances for getting an FHA loan.
According to the HUD announcement issued earlier this week:
“The new supplemental performance metric will help FHA lenders see the impact of their business at all ends of the credit spectrum in line with FHA’s willingness to insure loans to eligible borrowers with lower credit scores.”
The phrase HUD keeps repeating, now and in the past, is “eligible but underserved borrowers.” This refers to reasonably qualified borrowers who have recovered from past credit problems. Overly strict lending rules often exclude such people from the housing market. HUD hopes to increase lending to this group and thereby extend homeownership to a larger pool of Americans.
Of course, this doesn’t mean that just anyone can qualify for an FHA loan. Borrowers with bad credit histories who have regained their financial footing may benefit from this gradual easing of standards. But those with more recent and/or more severe credit issues (like delinquencies, defaults, and excessive debt) will probably still have a hard time getting approved.
Bad credit FHA loans are just the latest in a series of easing trends within the mortgage industry. On the conventional side of the market, we’ve also seen an increase in the number of low-down-payment mortgage options. For instance, an increasing number of lenders are offering 3% down payments to well-qualified borrowers.
The bottom line here is that borrowers should not assume they’re unqualified for an FHA loan due to past credit problems. Talk to a HUD-approved lender to find out where you stand. Better yet, talk two a few of them.
Visit FHAhandbook.com to Learn About the Program
Home buyers have a lot of questions about the FHA program. I know this because we’ve been fielding their questions for more than 10 years, through the Home Buying Institute and other channels. To help clarify this program, we’ve created an unofficial guide to FHA loans. Our 60-page ebook explains the HUD mortgage insurance program in plain English, and it’s free to download. You can learn more or download a copy of the handbook by visiting FHAhandbook.com.