Blog, Credit, FHA

FHA Credit Score Requirements

More and more people are asking – What is the FHA Score now?

• For the short version just read the next 3 lines, if you want more… keep going.

I can still write FHA Purchase Loans without restriction at a 620.

I can still write FHA Refinance Loans without restriction at a 640.

Case-by-case basis (restrictions: not normal FHA guidelines) I can still write FHA Purchase and Refinance at a 580

 

Now the part I feel is important but will probably only be read by a few over achievers…

The answer to that question: “What is the FHA Score now?” It depends on who you ask!  No kidding there is not a definitive answer that covers all the Banks, Brokers, Wholesale or Correspondent Lenders.  They all make their own rules!  (Not really but they act like they do)

If you ask The Department of Housing and Urban Development – the overseer of FHA, they’ll tell you: FHA has never had a credit score minimum.  What how can that be?  If FHA doesn’t have a minimum then why do the banks and lenders impose them?

First we have to understand what FHA really is…its a guarantee, it’s insurance.  The FHA doesn’t actually own the loan or lend the money.  The FHA protects the “owner” of the loan not the borrower.

The owner of the loan is far removed from the loan officer, underwriter, bank or wholesale lender.  More often than not he loan is packaged as a security instrument and combined with a ton of other loans and sold in bulk on the open market as a “Mortgage Backed Security”

Now we need to understand the flow of a loan once it’s closed: (I really wish I knew how to make a flow chart on here)..kind of cave man like but I hope you get the idea…

BROKER CLOSED LOAN
Wholesale Lender (not always used)
Correspondent Lender/Bank		BANK CLOSED LOAN
Sold and Packaged as Mortgage Backed Securities

OK so now we know that the loan ends up in the same place, regardless of where it’s originated.  Right?

Now back to the minimum score requirement…the reason why the Broker says they have a minimum score is because the Wholesale Lender imposes a minimum on the Broker.  The reason why the Wholesale lender has a minimum is because the Bank/Correspondent Lender imposes a minimum on them and so on….  For many the minimum imposed is tied directly to past loan performance. 

(here comes the answer) 

And ultimately the minimum is forced by the Bank/Lender that is selling the loan to the open market.  The bank that is involved has performance guarantees in place with the investor that is packaging the loans.  If the loans don’t perform to the set standard the bank must cover the difference.  If their performance slips too far….they need to put higher quality loans in the pool to bring up the performance level of the whole pool. 

Here is my FINAL ANSWER: Depending on who the “END” investor/bank is that is why you are being told “The FHA Mimimum Score is….”

I really hope this helps, I’ll be glad to discuss it further with anyone that would like to.  Feel free to comment below.