There have been more credit-related changes to FHA loans in the last year than the previous ten years combined. And here comes another: Bank of America and Wells Fargo recently raised their FICO credit-score requirements for some FHA loans from 620 to 640. Going forward, borrowers with credit scores below 640 may not qualify for FHA loans.
This story was originally reported by Jody Shenn and John Gittelsohn on Bloomberg.com.
We have previously written about the new credit-score guidelines set forth by the Department of Housing Urban Development (HUD) in 2010. That was when HUD established the minimum credit score for FHA loans at 500, with 580 being the cutoff for the 3.5% down-payment program. But those numbers are largely meaningless, because most FHA-approved lenders will not approve a borrower with a credit score below 620. At least, that used to be the rule of thumb.
Recent developments show that lenders are raising the bar once again. Bank of America and Wells Fargo are the two largest mortgage lenders in the United States. Combined, these lenders account for the majority of home loans being made today. They both recently increased their credit score minimums for FHA loans from 620 to 640.
About the FHA: The Federal Housing Administration (FHA) does not actually make loans to consumers. Rather, they insure the loans made by primary lenders such as BOA and Wells Fargo. Thus, FHA home loans are also referred to as government-insured loans.
The lenders who make these loans are referred to as FHA-approved lenders.
The FHA has established some basic guidelines for mortgage underwriting. But the lenders impose their own (often more stringent) guidelines on top of the FHA’s minimum requirements. This latest credit-score development is an example of how mortgage lenders can be more strict than the FHA when making FHA home loans.
These changes will affect a rising number of home buyers. Ever since the housing market collapsed in 2008, the FHA’s market share has increased considerably. Today, about one-fifth of all mortgage loans are made through the FHA loan program. A 2010 home-buyer survey conducted by the Home Buying Institute suggests that FHA usage may increase even more in the future.