Effective March 18, 2019, FHA guidelines have changed. The Federal Housing Administration (FHA) has announced new stricter underwriting guidelines for borrowers with lower credit scores combined with higher debt to income ratios. Basically, FHA has been worried about certain loan risk factors and how they affect their portfolio statistics. So, buyers, sellers, real estate agents, lenders, and others dependent on the real estate market will see a change. These changes will result in more manually underwritten loans as well as more loan denials for buyers. Even though all FHA lenders must follow these new guidelines, OVM Financial loan officers are ready to help buyers overcome this obstacle.
What Are the 2019 FHA Guideline Changes?
Because of the reasons above, FHA has decided to adjust guidelines for the lower credit threshold. These new FHA guidelines solely address credit scores of 619 or less. Specifically, FHA has decided to place limits on borrower’s maximum housing and total debt to income ratio. Automated underwriting plays a key role in lender pre-approvals, but borrowers with scores under 620 and a total debt to income ratio over 43% must be manually underwritten. Even if an automated approval is received in these cases, the file must be downgraded to a manual review. Manual underwriting means a human underwriter must review the file against FHA underwriting guidelines.
These 2019 FHA guideline changes will undoubtedly make buying a home more difficult for buyers in this credit score range. However, there are a few compensating factors that may improve a borrower’s chance of qualifying if they are in the 600-619 credit score range.
Compensating Factors
Depending on a borrower’s max debt ratio, one or more of the following compensating factors may improve the chances of FHA qualification. Compensating factors include:
- Having cash reserves (emergency savings) in the bank
- Proof of residual income (income left over after all personal debts and expenses have been paid)
- Proof of additional income separate from income used to qualify
- Evidence of a “minimal housing payment increase” – (A minimal housing payment increase would mean that your mortgage payment is slightly more than/close to the amount of your current rent payment.)
Consult an OVM Financial loan officer to determine your debt ratio, and if one of the compensating factors mentioned below can improve your chances of qualifying for an FHA loan.
Why are FHA Guidelines Tougher on Low Score Borrowers?
This is not the first time FHA has made this announcement. Previously on January 31, 2013, FHA made a similar announcement through Mortgagee Letter 2013-05. Although, this rule was removed in August 2016. Since statistics have shown borrowers carrying under a 620 credit score and over a 43% debt to income ratio are putting a strain on FHA, it has re-established manual underwriting requirements.
FHA Concerns
- Higher level of FHA cash-out refinances
- More FHA loans have a higher debt to income ratio
- Decrease in borrower credit scores
Over the most recent years, FHA has seen a continued downward trend in the above areas. Thus, it adds risk to the FHA loan pool. Such risks mean a higher rate of defaults. Higher defaults mean more FHA mortgage insurance claims. An increase in FHA mortgage insurance claims poses a threat to the FHA loan program.
Just in 2018, FHA cash-out refinances increased by about 60% compared to total refinances. Also during 2018, 25% of all FHA forward loans closed with over a 50% debt to income ratio. That is the highest percentage since 2000, which is not a good sign. Finally, FHA has experienced a drop in the average borrower credit score. At an average of 670 credit score, it is the lowest average since 2008. Additionally, 28% of all FHA loans during Q1 of 2019 have under 640 credit scores and 13% under 620.
So, to stay solvent and in business, FHA must correct this downward, risky trend, which is why these changes must happen.
Let OVM Financial Help You Navigate 2019 FHA Guidelines
Whether a buyer falls within the 600 – 619 credit score range or beneath it, an OVM loan officer can help. For buyers within this range, your loan officer will dig deep to find compensating factors. Discovering these traits could make a difference.
How to Improve Credit Scores
Low credit scores are a common problem. There are many factors which cause low scores such as late payments, collections, high credit card balances, inquiries, new credit, and more. The first step is understanding which factors are causing a drop in scores. Next, an OVM loan officer helps develop a plan to increase credit scores. So, even if a buyer does not qualify at first, the goal is getting to the point of loan approval. The time frame for approval could just be a few days. One tool includes rapid credit re-score.
Learn Tips for Increasing Credit Scores
FHA Guidelines Are Still Very Flexible
Even though FHA is more strict in this area, there are plenty of other guidelines to help buyers become homeowners. Student loans are a huge roadblock to buying a home. Fortunately, FHA loans provide flexibility for buyers with student loan debt. Also, FHA allows for non-occupying co-borrowers. These are co-signors to help a buyer qualify better to purchase. Plus, the “non-occupying” part means the co-signor does not have to live in the house.
Furthermore, an FHA 203k loan helps those looking to buy a fixer-upper home or make improvements to an existing home. This loan product allows improvements ranging from minor items to structural renovations. To learn more about how one of the 203k loans may help, check out a recent article which describes how 203k loans work.
There are other FHA guidelines help buyers achieve home ownership such as sellers paying closing costs, grossing up nontaxable income, buying a home as a pastor, and flexible commission income or self-employed income guidelines. To learn more, contact an OVM loan officer today. We know FHA loans!
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