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FHA Sets Credit Score Limit for Mortgage Borrowers
By CJ Moore
Sep
07
2010
The Federal Housing Administration has set credit score limits for the first time for homebuyers, which will be effective Oct. 4.
In the past, the credit score requirements for any FHA-backed loans have been at the discretion of the lender. That will still be the case for the most part; however, the FHA has initiated some of its own limits.
Because of the risk that borrowers with a credit score of 500 or lower present, those borrowers will no longer be allowed to obtain a FHA-back mortgage loan. Because of what has happened in housing – with millions of foreclosures taking place -- lenders had already become wary of borrowers with a low credit score, so this is not a monumental change.
For borrowers with a credit score range of 500 to 579, they will be required to make a minimum loan-to-value down payment of 10 percent, which also will not be a big change for most lenders. It’s typical that borrowers who are more at-risk (those with a lower credit score) are required to put down a larger down payment.
The new changes announced by the FHA also have regulations on gifts that help a borrower pay a down payment. Gifts from family members, charitable organizations, employers and government entities are allowed; however those providing the gift cannot financially benefit from a sale.
These changes are another move by HUD to reduce the number of risky borrowers, as too many were able to get loans during the housing boom. Too many regulations could temper a much-needed recovery in the housing market, but this should not have that great of an effect.
In the past, the credit score requirements for any FHA-backed loans have been at the discretion of the lender. That will still be the case for the most part; however, the FHA has initiated some of its own limits.
Because of the risk that borrowers with a credit score of 500 or lower present, those borrowers will no longer be allowed to obtain a FHA-back mortgage loan. Because of what has happened in housing – with millions of foreclosures taking place -- lenders had already become wary of borrowers with a low credit score, so this is not a monumental change.
For borrowers with a credit score range of 500 to 579, they will be required to make a minimum loan-to-value down payment of 10 percent, which also will not be a big change for most lenders. It’s typical that borrowers who are more at-risk (those with a lower credit score) are required to put down a larger down payment.
The new changes announced by the FHA also have regulations on gifts that help a borrower pay a down payment. Gifts from family members, charitable organizations, employers and government entities are allowed; however those providing the gift cannot financially benefit from a sale.
These changes are another move by HUD to reduce the number of risky borrowers, as too many were able to get loans during the housing boom. Too many regulations could temper a much-needed recovery in the housing market, but this should not have that great of an effect.
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