FHA mortgages have been one of the most popular first time home buyer programs available. FHA only requires 3.5% down, you can have credit scores as low as 580, debt to income ratios can be higher than most conventional mortgages and the interest rates are typically lower than conventional rates. However, there were some changes that may affect you as a new home buyer.
FHA came out in March with some news that may not help buyers. The guidelines did not change – gifts are still allowed, seller can help with closing costs, scores can still be down to 580 but they are tightening the automated approvals. With FHA case numbers ordered after March 17, 2019, the FHA TOTAL scorecard (the automated underwriting system) was tweaked to help address issues that FHA was seeing. The tweaks were to adjust for lower credit scores and layering of risk that FHA has been noticing in the last few years. This means that for some, their file would no longer be approved. Manual underwriting is still allowed, but that means lower ratios and more review of the credit report.
FHA has noticed over the last few years that there has been an increase in cash out refinances. In the fiscal year of 2018, cash out refinances were more than 60% of the total refinance volume. That concerns FHA administrators.
There has also been a large increase in the number of mortgages with debt to income ratios of over 50%. In 2018, over 25% of FHA mortgages had debt to income ratios over 50%. That number continued into January 2019.
The average credit score for FHA loans dropped in 2018 to 670. In the first quarter of 2019, more than 28% of FHA mortgages had credit scores under 640. There was an increasing number of loans with credit scores under 640 and debt to income ratios over 50%, that worries FHA administrators.
What this means to most home buyers using FHA mortgages is simple. If your credit score is lower, you will need to watch your debt to income ratios (meaning you may be approved for less than you would have in the past). You will also need to try and have reserves. I have had files that would not be approved through the FHA TOTAL scorecard without 2-3 months of reserves. Reserves are funds left over after closing -they can be retirement accounts (as long as you can access them), checking/savings accounts, stocks, bonds and mutual funds.
For those that have had an FHA approval for a couple months and have not found a home yet, you may want to check with your lender to make sure your approval is still valid. The best suggestion is to watch your monthly payments, try to lower your debt and save money.
FHA is still a great way to buy a home, especially for those that have lower credit scores – we just need to make sure your mortgage is still approved!
Leslie Vanderwerf, NMLS ID#335509, American Mortgage & Equity Consultants, Inc., An Equal Housing Lender, NMLS#150953 – Email – Website
