Credit score below 500? No FHA home loan

chart_delinquent_rate.top.gif By Les Christie, staff writer


NEW YORK (CNNMoney.com) -- The once wide-open doorway to homeownership closed a teensy bit more this week when a key government agency announced a proposal to no longer allow mortgages for borrowers with very low credit scores.

The Department of Housing and Urban Development said that it intends to require borrowers to have scores of at least 500 to qualify for FHA-insured loans. The agency has not required a minimum score before.

The practical impact of this move will be extremely limited; during the second quarter of 2010, no FHA-insured loans were issued to borrowers with sub-500 scores. And, in fact, less than 1% of borrowers were below 580; most loans went to borrowers with scores above 620.

"It really is just conforming FHA standards to what FHA lenders have already been doing," said Michael Fratantoni, vice president of research and economics for the Mortgage Bankers Association.

The initiative is part of an ongoing effort to reduce default risk to the FHA loan portfolio and to boost the reserves that back those loans, according to HUD Commissioner David Stevens.

"These are the latest in a series of changes to allow the FHA to manage its risk better while continuing to support the nation's housing recovery," he said. "By protecting FHA's capital reserves, we can continue providing affordable, responsible mortgage products and will remain the nation's largest source of home purchase financing for underserved communities."

HUD has been expressing increasing concern over default risk in the wake of the housing bust. The percentage of delinquent FHA loans has trended up, as have rates for virtually all mortgage loans.

During May, 8.97% of all FHA loans were seriously delinquent (seasonably adjusted). That was up from 7.93% during May 2009. But defaults have turned downward since January, when they peaked at 9.16%.

The defaults have drained FHA reserve, which is funded by insurance payments, to below the 2% minimum mandated by Congress. Taxpayer money could be in jeopardy if the insurance funds are depleted any further.

The FHA had earlier proposed steps to reduce delinquencies and so cut that risk. One was to raise the minimum downpayment to 10% for borrowers with credit scores below 580.

Another was to reduce allowable seller concessions to no more than 3% of the sale price. That would force buyers to make more of a financial commitment to their home. Given more "skin in the game," they are less likely to default.

These policies are all still in the proposal stage. Before going into effect, the department is soliciting public comment on the matters for 30 days. Then, it will evaluate the comments before implementing any changes.

The FHA has taken on increasing importance since the subprime mortgage crisis hit. It not only has continued its primary mission, providing mortgage financing for underserved constituencies, but is also issuing low down-payment loans for other Americans who would have had access to private lending in the past.

Congress also raised the maximum people could borrow so that home buyers in high-housing-cost areas could qualfy for FHA loans.

All this has combined to raise FHA market share to about 25% of all loans being issued right, up from just a couple of percentage points a few years ago. The FHA, along with the other government-backed mortgage giants, Fannie Mae and Freddie Mac, now account for nearly all the mortgage lending activity in the nation today. To top of page


Frontline troops push for solar energy
The U.S. Marines are testing renewable energy technologies like solar to reduce costs and casualties associated with fossil fuels. Play
25 Best Places to find rich singles
Looking for Mr. or Ms. Moneybags? Hunt down the perfect mate in these wealthy cities, which are brimming with unattached professionals. More
Fun festivals: Twins to mustard to pirates!
You'll see double in Twinsburg, Ohio, and Ketchup lovers should beware in Middleton, WI. Here's some of the best and strangest town festivals. Play
Overnight Avg Rate Latest Change Last Week
30 yr fixed3.84%3.80%
15 yr fixed2.95%2.90%
5/1 ARM3.23%3.05%
30 yr refi3.84%3.81%
15 yr refi3.01%2.96%
Rate data provided
by Bankrate.com
View rates in your area
 
Find personalized rates:
Index Last Change % Change
Dow 17,606.65 -65.95 -0.37%
Nasdaq 4,744.67 -13.21 -0.28%
S&P 500 2,045.25 -6.57 -0.32%
Treasuries 1.80 -0.01 -0.72%
Data as of 10:02am ET
Company Price Change % Change
Bank of America Corp... 15.76 0.03 0.19%
Apple Inc 113.47 0.49 0.44%
General Electric Co 24.49 0.01 0.03%
Mattel Inc 26.50 -1.54 -5.49%
Intel Corp 35.91 -0.54 -1.47%
Data as of 9:48am ET

Sections

The struggling toy maker says CEO Bryan Stockton will be replaced by long-time board member Christopher Sinclair. More

Syriza's victory in Greek elections has sent a charge of worry through Europe, and puts Greece's economic future in doubt. So what happens next? More

It's illegal to fly drones into the White House property -- in case it's not already obvious. More

First introduced in 2007 as way of sifting through Twitter's newsfeed, the hashtag has since spawned new tech businesses and become a pop culture phenom that retailers are cashing in on. More

Target-date funds have become a wildly popular option among those seeking a hands-off approach to retirement investing. But not all of these funds are created equally. More

Most stock quote data provided by BATS. Market indices are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer.

Morningstar: © 2015 Morningstar, Inc. All Rights Reserved.

Factset: FactSet Research Systems Inc. 2015. All rights reserved.

Chicago Mercantile Association: Certain market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved.

Dow Jones: The Dow Jones branded indices are proprietary to and are calculated, distributed and marketed by DJI Opco, a subsidiary of S&P Dow Jones Indices LLC and have been licensed for use to S&P Opco, LLC and CNN. Standard & Poor's and S&P are registered trademarks of Standard & Poor’s Financial Services LLC and Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC. All content of the Dow Jones branded indices © S&P Dow Jones Indices LLC 2015 and/or its affiliates.