Federal Housing Administration (FHA) loans were once the most utilized source for home buyers to finance a new house, that is until the 100% sub-prime mortgages appeared.
Then the mortgage meltdown came along and pushed lenders to tighten underwriting standards and credit score requirements. Today, the average credit score on an FHA-insured mortgage is 700, and in Tampa Bay, you usually need a minimum score of 640 to be considered.
There are some exceptions to that rule, but the lenders that offer loans to home buyers with lower scores are lacking in the customer service department and seem to be indifferent about helping these buyers obtain a mortgage.
Recently, the Department of Housing and Urban Development said it would like to see FHA lenders relax their credit score minimums which would allow more borrowers to qualify for FHA loans. But lenders are telling HUD officials that their agency needs to change FHA's lender/monitoring system known as Neighborhood Watch so they aren't penalized for making loans to borrowers with lower credit scores that end up in default.
It’s a catch 22. The lenders are willing to do what HUD is asking, but their performance on loan defaults is compared to the average default rate for all FHA loans and FHA does not make their performance comparisons by using loans made to people with similar credit scores and risk characteristics. Lenders with above average default and claim rates are placed on a watch list and a high default and claim rate can trigger audits by FHA or the HUD Inspector General. These audits often lead to indemnification demands for actual and future loan losses.
As a result, FHA lenders have been more comfortable lending to borrowers with higher credit scores and have left many home buyers that have the ability to pay with no opportunity to own a home when prices are the lowest they have been in a decade and interest rates are at record lows.
The Mortgage Bankers Association has said that access to credit is an important consideration for the recovery of the housing market and that the secretary of HUD and the administration should change the way they compare default ratios if they want to encourage lenders to use the full FHA credit box.
A change such as this would do wonders for the real estate market recovery and allow millions of people to purchase a home at a time when buying is cheaper than renting.
FHA loans made up approximate 34% of all new home loans in the Tampa real estate market last year.