FHA mortgages

No FHA Loans for Borrowers with Low Credit Scores

The issue of a borrower’s creditworthiness has become a key factor in securing a mortgage in today’s real estate market.  As a general rule, the less creditworthy a borrower is, the tougher it is to secure a loan, or the higher the interest rate is on the loan.  In a recent proposal from the Department of Housing and Urban Development (HUD),  the agency is requesting that borrowers seeking to use an FHA-insured loan for their home purchase need to have a credit score of at least 500.  This is currently the first time that an FHA-insured loan would require a minimum credit score from borrowers.

While this may seem to create some waves, Michael Fratatoni, the Vice President of Research and Economics  for the Mortgage Bankers Association, says that the request is “really just conforming FHA standards to what FHA lenders have already been doing.”  Statistics show that the second quarter of 2010 had no FHA-insured loans issued to borrowers with credit scores less than 500.  Most FHA-insured loans were actually issued to borrowers with credit scores above 620, and only 1% of borrowers with credit scores less than 580 received loans.

The driving force behind the request stems from a need to maintain the FHA’s cash reserves (in order to back up loans), and to maintain their ability to help support the housing economy.

While this idea is still in the proposal stage, the change could be implemented within the next couple of months.

Information for this article provided courtesy of CNNMoney.com, 2010.