Over the last two weeks, I have been getting emails from banks who lend in California stating their minimum FICO score is going up from 620 to 640. I even received a call from another Loan Officer asking for help because his buyers score dropped to 637 and he can only offer loans to 640 and above. This is marking another shift in the mortgage industry where lenders are trying to minimize their risk exposure to borrowers defaulting on their new home loan. I don’t expect all lenders to adopt this but most probably will.
The good news is that because my mortgage bank (both a direct lender and broker) is regulated by the CA Dept. of Real Estate, we have more lending sources to find our clients a lender who will approve their loan than a mortgage bank that is regulated by the Dept. of Corporations. Why is that? Because the California Department of Corporations banking regulations severely restrict who they can broker a loan to.
Thought for the day: When seeking an approval for a home loan, is it to your advantage to work with a lender who has access to all the niche wholesale lenders to meet your needs, or better to work with a bank who can only offer you what’s on their menu?
But I thought FHA doesn’t have a minimum FICO credit score requirement, it says so right in the underwriting guide? This was true up until January 20, 2010 when HUD/FHA announced new FICO credit score requirements. Borrowers putting 3.5% down payment must have at least 580 FICO. Borrowers with less than 580 must put 10% down. This is a clear indicator that HUD sees more risk associated with lower FICO borrowers.
How can lenders set their own higher FICO requirements when HUD/FHA clearly states they will insure a loan down to 580? I get asked this often, and here is what I say. The people with the money make the rules. FHA sets the very bare minimum approval guidelines…..they can’t make a lender take on more perceived risk then they want to. Lenders can apply their own more restrictive guidelines to reduce risk whenever they want…..with no prior notice. This is called a lender ‘overlay’. What they can’t do is discriminate buyers based on race, color, ethnicity, national origin, marital status, sex, familial status, religion, or age.
In HUD’s new minimum FICO requirement announcement, they also mentioned they will increase the monitoring, performance, and enforcement of FHA lenders. This means they are looking for banks who approve loans that have higher default rates and may not meet HUD minimum approval guidelines. More crackdown by HUD/FHA equals more scrutiny by underwriters to approve good loans. If they don’t, they could end having to buy the loan back from HUD/FHA and no one wants to pay out several hundred thousands of dollars of their own money on a loan HUD won’t insure.
In my opinion, I think HUD/FHA likes seeing lenders creating more restrictive guidelines because it reduces risk of default and they don’t look like the big bully bad guy making it more difficult to qualify for a loan.
What can you do to prepare as a future home buyer? If you are planning to purchase a home in the next 3-6 months, you need to know what your FICO score is. If it is above 580, but below 640, there are actions you can take to improve that score in a relatively short period of time.
What if I can’t get my score above 620 or 640? You are in luck because we have relationships with lenders who will fund FHA home loans for borrowers with FICO credit scores between 580 and 640. It’s not easy, and there are additional requirements, but it can be done. Most Loan Officers I know won’t even attempt to help a borrower with a FICO below 620 because they feel it is too much work. Sorry, just keeping it real.
If you want to have a conversation about what you need to do to get your FICO score up over 580 or 620, want to know how much you qualify for, or learn how to qualify for 100% no down payment loan program, pick up the phone and call me (951) 215-6119 or email me brad(at)homeloanartist.com. I’m here to help.