Getting an FHA mortgage got a bit easier in March of 2014! FHA Mortgage regulations eased opening the window of opportunity a bit wider for those applying for an Arizona home loan. There are 2 areas that FHA created additional opportunity in. One of the two was a true FHA change and the other is an industry adaptation (see below for more).
FHA Mortgage Manual Approvals Get Easier (true FHA change)
HUD mortgagee letter made getting an FHA loan easier! Prior HUD’s announcement, FHA borrowers without an automated approval had a 43% maximum debt-to-income ratio. This is far below the 56.99% average debt-to-income ratio for FHA loan applications that received an automated approval. The HUD Mortgagee raised the allowable debt-to-income ratio to 50% for borrowers needing a manual approval. This rule went into effect for all FHA case numbers issued on or after April 21, 2014.
The difference between an FHA manual approval and an FHA automated approval is quite simple. An automated approval is when an automated underwriting system issue an FHA loan approval. On the other hand, borrowers considered too risky or that don’t meet traditional FHA guidelines must have their loan applications manually approved. Manual loan approvals must follow more rigid guidelines and are approved by a human underwriter.
FHA Mortgage Minimum Score Drops to 600 (Industry change)
Borrowers with a credit score of 600 are now eligible for an FHA loan! While this is not an actual FHA change, it is a mortgage industry change. FHA now allows borrowers with a 600 score eligible for an FHA loan ,however, for the most part, the mortgage industry has not. Ultimately, the mortgage industry’s guidelines (aka “layered guidelines”) supersede core FHA regulations. For example, if FHA allows for a 600 credit score and the mortgage industry sets a more stringent guideline; they must go by the MORE stringent industry guideline.
Recently, we have reduced our credit score requirements for an FHA loan back down to 600 credit score. This is great news for many borrowers looking to qualify for an FHA loan that have less than perfect credit. Borrowers with credit scores below 640 must meet tougher guidelines when applying for an FHA loan than those with a 640 or above score.
These changes were made to help borrowers qualify for FHA financing who were otherwise considered a bigger credit risk. These 2 changes were proof FHA is working to improve the mortgage options for those with credit challenges (it also makes for good politics!).
By Jeremy House