It's getting easier for home buyers to get approved for an FHA-backed home loan.
Major lenders are now approving FHA mortgage applications for borrowers whose credit scores are 580 or better, a drop of 60 point as compared to last year, when FHA lenders required credit scores of 640 or better.
Borrowers are taking advantage, too.
According to the Ellie Mae June 2015 Origination Insight Report, the average FICO on a closed FHA refinance was down 6 points from the month prior, to 677; and purchase FICOs average in the 600s, too.
The news comes at a time when FHA loans are in demand. The program's 3.5% downpayment minimum is among the most lenient for today's home buyers; and underwriting requirements on an FHA loan are often loose.
FHA loans are an important component of the U.S. housing and mortgage market.
FHA loans are loans which are insured by the Federal Housing Administration and made available to U.S. buyers and existing homeowners.
The FHA was formed in 1934 and it exists to provide affordable housing to Americans. Today, it's the largest insurer of mortgage loans worldwide.
The Federal Housing Administration doesn't actually make loans. Rather, it insures loans made by the nation's banks, providing protection against default and loss.
In order to gain the FHA's protection, lenders must only make sure that the loan in question meets the lending standards as set forth by the FHA.
The FHA's rule book is known as "the FHA guidelines" and FHA guidelines describe all allowable loan traits, as well as the going terms of an Federal Housing Administration-backed loan.
For example, FHA guidelines state that home buyers must make a minimum downpayment of 3.5 percent against a home's purchase price; and that buyers can be cleared to buy a home 12 months after a bankruptcy, short sale, or foreclosure.
Guidelines also place limits on the size of an FHA-backed loan, which varies by county. FHA loan limits range from $271,200 for a single-family home to $1,202,925 for a 4-unit home.
FHA mortgage guidelines define which loans the Federal Housing Administration will, and will not, insure.
However, U.S. lenders don't underwrite loans to the FHA guidelines as they're written, to the letter. They impose additional restrictions known as investor overlays which make it harder for an applicant to qualified for an FHA-backed loan.
One such overlay is linked to the FHA Streamline Refinance.
According to the official Federal Housing Administration guidelines, with an FHA Streamline Refinance, lenders are not required to verify income, employment or credit scores. Yet, many lenders choose to verify regardless. This is because the FHA penalizes banks for making too many "bad loans" and verifications can cut down on defaults.
Another important overlay is linked to your credit score.
The FHA rules state that it will insure home loans for which the borrower has a credit score of 500 or higher. Banks, however, are reluctant to make such loans.
Buyers with credit scores of 500 are highly likely to default in the next 6 months, which would negatively affect a bank's FHA default rate, leading to fines, penalties, and perhaps, termination from the FHA insurance program.
Beginning in late-2011, most banks enforced a minimum credit score for FHA loans of 640. That minimum score has since been lowered.
U.S. home buyers can now get an FHA loan with credit scores of just 580. And, as the domestic economy continues to improve; and, as U.S. housing regains lost value, it's likely that the minimum FHA FICO score will drop again.
For today's U.S. home buyers, the Federal Housing Administration mortgage is among the most lenient and forgiving mortgage programs available. The program requires a downpayment of just 3.5 percent and mortgage rates are regularly lower than those for a comparable fixed-rate loan.
Find out whether you're FHA-eligible. Get today's rates now. Quotes are no cost, no obligation, and don't require your social security number to get started.
The information contained on The Mortgage Reports website is for informational purposes only and is not an advertisement for products offered by Full Beaker. The views and opinions expressed herein are those of the author and do not reflect the policy or position of Full Beaker, its officers, parent, or affiliates.
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2015 Conforming, FHA, & VA Loan Limits
Mortgage loan limits for every U.S. county, as published by Fannie Mae & Freddie Mac, the Federal Housing Administration (FHA), and the Department of Veterans Affairs (VA)