The nation’s top mortgage lender has lowered the minimum credit score required for an FHA loan, according to American Banker.
Going forward, the bank is accepting FHA loan applications from borrowers with credit scores as low as 500, though they must come up with a 10 percent down payment and sport a maximum debt-to-income ratio of 31 percent.
That seems like a pretty safe bet, given the fact that home prices have likely seen bottom or are relatively close to bottoming out.
Previously, Wells only accepted FHA loans from borrowers with credit scores of 600 and upwards.
The move was made following pressure from HUD, which oversees FHA lending, along with affordable housing advocates, largely because FHA loans are intended to serve the underserved, not everyday Joes.
Back in November, Wells and other top lenders were actually raising minimum credit score requirements on FHA loans…
It is believed that loans originated via mortgage brokers and correspondent lenders still carry harsher underwriting standards, with the minimum credit score 620 or 640.
At the end of the third quarter of 2010, just 3.8 percent of FHA loans had scores below 620 or no credit score, compared to 50.4 percent as of the end of 2008.
Back in mid-2010, the FHA announced a minimum credit score of 500 on all loan programs, with a 580 score needed to qualify for the flagship 3.5 percent down payment program.
There’s talk in the news and throughout the housing market industry that lending giant Wells Fargo is lowering credit scores it requires for prospective home buyers financing with FHA loans. While this may seem – on the surface at least - like great news for Americans looking to buy a home … we approach this move with cautious optimism.
First of all, AmeriFirst Home Mortgage CEO and co-founder David N Gahm shares a little bit about how the regional community mortgage banker handles the housing market and lending.
“At AmeriFirst, while credit score is important, it’s not the sole factor in qualifying a home buyer. We start with FICO scores as a general ‘jumping off point,’ but it’s not the end-all for home buyers. We fully realize that every person has a unique situation that we want to understand, and they’re much more than a number. Beyond credit scores, our underwriters take into account your income, job security (length of time in a job), existing monthly debt and your overall financial picture.
So when we’re seeing a big bank like Wells Fargo talk about lowering credit scores, it means they tend to put much more weight on the FICO score than a more agile lender like us. We see that as good news for the housing market, as it gives folks with less-than-pristine credit a chance to talk to a big-box lender like that. But for us, we’re already looking at these borrowers with a different eye. We see you as a person, not a number.”
Related: What's a Good Credit Score for a First Time Home Buyer?
A History Lesson in Housing
A little housing market history can put into perspective the move by Wells Fargo and other large lenders like them. Mortgage loans made back in early 2000s with very low credit scores led to housing bubble burst. Credit scores were nearly insignificant to many lenders and mortgage brokers for a time, and some home buyers with financial difficulties and no ability to repay large loans ended up with big houses and even bigger house payments.
When mortgages like interest only loans and balloon payments came due, average homeowners had trouble settling their debt. This led to the messy housing market meltdown we’re still paying the price for today. These sub-prime mortgage loans took down a lot of homeowners and big banks alike.
Side note: Mortgage bankers like AmeriFirst Home Mortgage who weathered this storm did so through avoiding the temptation of fast-money in sub-prime mortgage loans. Good business decisions like this led to longevity in a troubled market.
After this financial fiasco, credit scores became the driving force behind loan decisions. This is why today, you see major banks looking almost exclusively at FICO scores to qualify borrowers.
Where Are We Today?
Dave calls the current housing market quite active. “This is the most pristine era of credit since 2009 for HUD. Delinquencies on new business are at historical lows. The question now becomes, will fair lending, Qualified Mortgage (QM) & other laws recently put into place as a reaction to poor lending decisions by some major banks lead to a loss of opportunity to buy a house to qualified borrowers? This is why there’s pressure on major lenders to make many loans to qualified borrowers, and why lenders like Wells Fargo consider changes like lowering credit scores. Because their reach is so great and covers such a variety of borrowers, making a change to policy like FICO score minimums helps them make a broad difference.
In comparison, we at AmeriFirst Home Mortgage are able to be more agile because we securitize directly with GNMA (Ginnie Mae). Rather than selling loans to aggregators and big banks, we service our loans and work directly with investors. This means we get to set our own FICO score guidelines. We have loan level price adjusters (LLPAs) on different FICOs. We can look at quality of loan, not size of FICO. We don’t let FICO be the only deciding factor. We’ll take a closer look at those lower scores.
You see, there are many ‘good loans’ below 640 – you just have to take a closer look at them. If it’s a good loan, it’s a good loan.
Because of the way AmeriFirst does business, and how we work with our borrowers one-on-one rather than as a crowd, our book of business is pristine – we have very low delinquency rates. We work with our clients to ensure success. We can because we’re agile. These bigger lenders – while they’re great in their own ways – aren’t as agile.“
Final Thought on Wells Fargo Lowering FICO Scores for FHA Loans
Overall, the lowering of FICO score requirements by a big bank like Wells Fargo is a good thing for the housing market. It means more borrowers have a chance to make their dream of home ownership come true. Looking back over recent history, banks will need to exercise caution and make sure credit scores aren’t the only factor in determining whether a borrower like you is ready to buy a home. If we begin to lower scores to sub-prime levels, we’re likely due for another crash.
The good news is that in today’s housing market, home buyers have a choice like AmeriFirst Home Mortgage – an agile community lender that considers other factors in buying a home. you also have many choices when it comes to mortgage loan options.
(creative commons photo credit)