Low Credit Scores Causing Problem for Home Loans

FHA mortgages were once a gateway for first-time and troubled mortgage borrowers to get a loan so they can get a home. But that doorway has closed a little bit as the government recently announced that it may pass a proposal that restricts borrowers with very low credit scores from getting and FHA mortgage.

The Department of Housing and Urban Development wants to regulate the credit scores that qualify for FHA mortgage loans. Officials want to make it so borrowers must have a credit score of at least 500 in order to qualify for mortgages that are insured by the FHA. This will be the first time in the housing industry that the department has required a minimum score.

The new regulations probably won’t have a huge impact on the housing market. In the second quarter of this year, there were not any FHA loans issued to borrowers who had a credit score of less than 500. There were fewer than one percent of mortgage applications from borrowers who had a score of less than 580. The majority of the mortgage loans were granted for those borrowers with a credit score of at least 620.

According to Michael Fratantoni, the vice president of research and economics for the Mortgage Bankers Association, the FHA has had a practice of not allowing borrowers with a credit score lower than 500 qualify for a mortgage. The new regulation will just make this practice official. The proposal is part of a greater effort to reduce the number of defaulted mortgages and to increase the funds that secure those mortgage loans, says David Stevens, the HUD Commissioner. HUD has experienced many defaulted mortgage loans as a result of the housing crisis and the number of FHA loans has also increased in the last couple years. In May of this year, nearly 9 percent of all FHA loans were seriously delinquent. That’s about a one percent increase over May of 2009.

The FHA has also been playing with some other ideas to help reduce the number of mortgage defaults and delinquencies. One proposal would require borrowers with credit scores lower than 580 to put at least 10 percent down on their new home. Officials figure that if buyers have more money invested in their home, they will be less likely to default on their mortgage payments.

The housing departments are looking for public opinion on these proposals as they have not gone into effect as of yet. HUD and FHA will evaluate any comments, opinions or input before putting these proposals into practice so be sure to let your voice be known.