New FHA loan requirements go into effect October 4, 2010
WASHINGTON D.C. LoanSafe.org) – In accordance with the final Federal Register Notice [FR-5404-N-02] on minimum decision credit scores and LTV ratios for FHA-insured single family mortgages, the new requirements are Borrowers with a minimum decision credit score at or above 580 are eligible for maximum financing.(
- Borrowers with a minimum decision credit score between 500 and 579 are limited to 90 percent LTV.
- Borrowers with a minimum decision credit score of less than 500 are not eligible for FHA-insured mortgage financing.
- Borrowers with a non-traditional credit history or insufficient credit are eligible for maximum financing but must meet the underwriting guidance in HUD 4155.1 4.C.3.
- Borrowers using 203(h), Mortgage Insurance for Disaster Victims, are eligible for 100 percent financing and no downpayment is required, provided that the borrowers have a minimum credit score of 500 (borrowers with decision credit scores below 500 are not eligible for FHA financing).
These new requirements are applicable to all Single Family programs except Title I, Home Equity Conversion Mortgages; HOPE for Homeowners; Section 247; Section 248; Section 223(e) and Section 238.
Note: For temporary minimum credit scores and LTV requirements for refinancing conventional mortgages in a negative equity position, see Mortgagee Letter 2010-23.
As discussed in the July 15, 2010, notice, FHA serves very few borrowers with credit scores below 500; however, the performance of these borrowers is very poor. FHA data indicate that insured mortgages with decision credit scores below 580 have significantly worse default and claim experience than do loans at or above 580. The revised credit score and LTV requirements increase the likelihood that borrowers who are offered FHA insured mortgages are capable of repaying these mortgages.
Under this document, effectively, a borrower with a decision credit score between 500 and 579 will be required to make a greater down payment [at minimum, 10 percent] than a borrower with a higher score, for the purchase of a home with the same sales price.3 Borrowers with credit scores below 500 will not be eligible for FHA-insured financing. The new LTV and credit score requirements will reduce the risk to the MMIF and ensure that home buyers are offered mortgage loans that are sustainable.
The July 15, 2010, notice represents another step in HUD’s effort to preserve the MMIF and preserve FHA as a source of available credit for affordable home mortgages. Interested readers are referred to the July 15, 2010 notice for details regarding the proposed changes to FHA requirements.
IV. Establishment of Minimum Decision Credit Score and New LTV Requirements
Commencing on the effective date: October 4, 2010.
1. Minimum Credit Score. Borrowers will be required to have a minimum decision credit score of no less than 500 to be eligible for FHA financing. The decision credit score used by FHA is based on methodologies developed by the FICO Corporation. FICO scores, which range from a low of 300 to a high of 850, are calculated with input by each of the three National Credit Bureaus and are based upon credit-related information reported by creditors, specific to each applicant. Lower credit scores indicate greater risk of default on any new credit extended to the applicant. The decision credit score is based on the middle of three National Credit Bureau scores or the lower of two scores when all three are not available, for the lowest scoring applicant.
2. LTV requirements. The LTV for
FHA-insured mortgage loans (purchase and refinance) will be limited to 90 percent for borrowers with a decision score between 500 and 579. Maximum FHA-insured financing (typically, 96.5 percent LTV for purchase transactions and 97.75 percent for rate and term refinance transactions) will continue to be available for borrowers with credit scores at or above 580. 3. Temporary Exemption for Borrowers Seeking to Refinance.
As indicated in the July 15, 2010 notice, FHA is providing a special, temporary allowance to permit higher LTV mortgage loans for borrowers with lower decision credit scores, so long as they involve a reduction of existing mortgage indebtedness pursuant to FHA program adjustments announced in HUD Mortgagee Letter 2010–23.4 In accordance with Mortgagee Letter 2010– 23, the current mortgage lender will need to agree to accept a short pay off, accepting less than the full amount owed on the original mortgage in order to satisfy the outstanding debt.
This temporary exemption recognizes that, given current economic conditions, the decision credit scores announced in this notice may be counterproductive in helping existing homeowners refinance to obtain more affordable mortgages and save their homes. FHA recognizes that even homeowners who have been able to make their monthly payments may have had their credit scores negatively impacted by the downturn in the economy which has so seriously affected the housing market. This exemption is applicable only to borrowers with credit scores between 500 to 579.
Further, the exemption is applicable only to refinance transactions originated pursuant to Mortgagee Letter 2010–23 and closed on or before December 31, 2012.