FHA loans set to require minimum 640 middle score
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The numbers have been considered and tossed around for some time and now most lenders and banks are making the official move to raise FHA minimum credit scores to 640 from a current credit score of 620. While there will almost certainly be those who claim they can and will offer insured loans below 640, the reality is they likely will not close or be extremely difficult to close – especially if the advertiser is a correspondent lender or mortgage broker.
With bankers and lenders, everything is about risk. It used to be about risk and market demands but with what has happened over the course of the last several months, the market no longer gets what it wants and — just as the author predicted four years ago — the lenders once again make the rules and the people must work within them.
Each lender has a different timeline for roll out and with the exception of less than a handful of banks, everyone is going to the 640 credit score. Even those who will still be offering solutions for borrowers with less than a 640 middle score will be charging extra points to borrowers. This means if someone with a 650 score receives a loan at a 4.5% interest rate, the borrower with a 638 score may get a 5.5% rate. While increased pricing does not mitigate risk, it does technically create a profit drip to cover losses in that pool.
According to an undisclosed source in the secondary marketing department of a major national lender, “loans below 640 have a 10% greater delinquency rate than loans with scores about 640.” This means if the delinquency rate above 640 is 5%, the delinquency rate below 640 is 15% and that’s a big hit for any lender to take.
Make sure you are working with a lender who knows how to work with borrowers who have credit challenges because it is still getting tighter in some areas of lending. A select few lenders do have true in-house re-scoring systems to work with borrowers who have faced past issues but who are starting over or overcoming challenging times.