Highlights from this report:
- On average, home buyers who use FHA loans have lower credit scores than those who use “regular” conventional mortgages.
- The average FICO credit score among FHA purchase loans during March 2019 was 672, according to a recent report by Ellie Mae.
- During that same month, the average FICO score among borrowers who used a conventional loan to buy a house was 752.
- FHA loans are generally easier to qualify for, mainly because lenders receive insurance backing from the government.
Earlier this month, Ellie Mae, Inc. published its latest “Origination Insight Report.” Ellie Mae is a software and technology provider for the mortgage lending industry. Lenders use their platform to originate and process home loans.
The company’s Origination Insight Reports pull data “from a robust sampling of approximately 80 percent of all mortgage applications that are initiated through Ellie Mae’s Encompass digital mortgage solution.”
In other words, these reports give us some good insight into the world of home loan origination and processing. They also help us identify broader trends within the lending industry.
Average Credit Score Among FHA Home Buyers: 672
One of the key trends identified in this latest report has to do with credit scores. On average, home buyers who use FHA-insured mortgage loans to buy a house have much lower credit scores than those who use conventional financing.
During the month of March 2019, the average FICO credit score for FHA purchase loans was 672. In contrast, the average score among home buyers who used a conventional mortgage loan to buy a home was 752 in March.
The FICO credit-scoring range goes from 300 to 850. A higher score is better.
The official minimum score for borrowers seeking an FHA loan is 500. In order to use the popular 3.5% down-payment option, borrowers must have a “minimum decision credit score” of 580 or higher. That’s according to HUD Handbook 4000.1, the Single Family Housing Policy Handbook.
An Easier Path to Mortgage Financing?
There are some key differences between FHA and conventional home loans, and they help to explain the huge gap between average credit scores among home buyers.
A “conventional” mortgage product is one that is not insured or guaranteed by the government. FHA loans, on the other hand, do receive government backing via the Federal Housing Administration (part of HUD). This government insurance protects lenders from losses connected to borrower default, or failure to repay.
The qualification requirements for FHA loans are generally less strict than the standards used for conventional loans. This is largely due to the added layer of protection lenders receive, in the form of government mortgage insurance.
Borrowers with credit scores that are deemed too low for conventional financing often turn to the FHA loan program as a last resort, or at least a viable alternative.
This is partly why the average credit score among FHA home buyers is lower than the average for borrowers who use conventional loans.
FHA Borrowers Have Lower Scores Today Than in the Past
The latest Origination Insight Report revealed another noteworthy trend relating to FHA loans and credit scores. The average FICO score among home buyers who use this government-backed mortgage program dropped by 9% over the last 17 months or so.
- In November 2017, the average FICO score among FHA purchase loans was 681.
- As of last month (March 2019), that average had dropped to 672.
This could be why federal housing officials recently announced some underwriting policy changes for borrowers seeking an FHA loan (see below).
In contrast, the average score among home buyers using conventional mortgage loans has remained fairly steady over the past 12 to 18 months. So, by comparison, the standards used for conventional financing have remained more consistent in recent years.
Underwriting Changes Announced in 2019
Federal Housing Administration officials recently announced they would be paying closer attention to borrowers with lower credit scores and higher debt-to-income ratios. The agency refers to this combination as “risk layering” and said it will require lenders to manually underwrite some risky loans.
According to an FHA policy letter sent to lenders in March 2019:
“Effective for mortgages with case numbers assigned on or after March 18, 2019, FHA will update its Technology Open to Approved Lenders (TOTAL) Mortgage Scorecard to specifically manage the decrease in average borrower credit scores and the excessive risk layering that results when multiple risk factors are present.”Source: FHA INFO announcement #19-07
The TOTAL scorecard mentioned above is an algorithm that ties into the automated underwriting systems used by mortgage lenders. It evaluates borrowers based on their credit history and other application information.
With the recent changes made to TOTAL, mortgage lenders might now receive “feedback results for certain mortgages indicating that they must be manually underwritten.” After the manual review, the lender’s final decision “must be documented in accordance with existing FHA requirements for manually underwritten mortgages.”
It’s too early to say whether or not this change will result in a higher “rejection” rate among borrowers who use this program. The one thing we do know is that some borrowers with low credit scores and a relatively high debt-to-income ratio could undergo extra scrutiny when applying for an FHA loan.