Fewer first-time home buyers likely to qualify for mortgages under tougher FHA standards

Paul Davidson

Some first-time and low- to middle-income home buyers will likely be edged out of the housing market under tougher standards recently adopted by the Federal Housing Administration, experts say.

The FHA, which insures mortgages for borrowers with spotty credit who can’t afford a larger down payment, said it will put riskier loans through a more rigorous review. That likely will mean a larger portion will be denied while some borrowers may not even apply for the loans in the first place.

FHA officials imposed the stricter criteria because they’re concerned that the agency’s loan portfolio in recent years has included more borrowers who aren’t as creditworthy.

“We’ve seen continued deterioration in credit quality,” Keith Becker, the FHA’s chief risk officer, said in an interview. “We’ve observed a steady increase in credit risk.”

The vast majority of FHA loans are approved through an automated system while a small share are referred to the lenders, who manually review applications based on FHA guidelines. In 2016, the agency eliminated a rule that required manual reviews for all mortgage applications from borrowers with credit scores under 620 and above debt-to-income ratios of 43 percent.

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As a result, average borrower credit scores fell from 676 in 2017 to 670 in 2018. And more than 28 percent of mortgage approvals in the first quarter of fiscal year 2019 had credit scores of less than 640, agency figures show.

Becker says the agency isn’t reinstating the old thresholds and will instead take a more holistic approach to mortgage approvals that considers various criteria, though the effect will likely be similar. About 40,000 to 50,000 loans a year, or 4.5 percent of the agency’s total, that would have been approved automatically will now be put through manual review, FHA officials say.

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“It’s going to tighten credit,” says Guy Cecala, publisher of Inside Mortgage Finance. Some lenders, he says, will no longer process loans that don’t meet the new standards for automated approvals because manual reviews take longer and are more expensive. Others, he says, may adopt standards that are even tougher than the FHA’s so they’re not liable in case of default.

In total, he estimates, about 50,000 borrowers that previously received mortgages could be filtered out.

“Those (borrowers) that may be stretching their financial circumstances to buy a house could be affected” by the new criteria, says Ralph McLaughlin, chief deputy economist of CoreLogic, a real estate research firm. For example, he says, certain income, such as bonuses, that might pass muster in an automated process could get screened out in a manual system, while some personal loans could be disqualifying.

After analyzing the new FHA parameters, Quicken Loans, by far the largest FHA lender has “determined that this new criteria will have a de minimis effect on Quicken Loans’ FHA underwriting approval rates," company president Bob Walters said in a statement.

After the housing crisis, most banks turned away from FHA loans and non-bank lenders such as Quicken dominate the market.

For now, delinquencies remain low. The 60-day delinquency rate for FHA mortgages was 1.56 percent January, down from 1.65 percent a year earlier. The 90-day delinquency rate was 2.03 percent, down from 3.02 percent. And the serious delinquency rate beyond 90 days was 3.92 percent, down from 4.95 percent, FHA figures show.

But Becker says problem loans typically don’t show up as delinquencies until well after loan approvals, and the agency is trying to head off potential problems. He notes the share of mortgages becoming 60 days delinquent in the first six months of an origination rose from 0.37 percent in fiscal 2016 to 0.44 percent in fiscal 2018.

The FHA requires borrowers to have a down payment of at least 3.5 percent, well below a typical 20 percent. In exchange, borrowers pay a 1.75 percent upfront insurance premium and 0.8 percent to 1 percent annual fee for a 30-year mortgage.

The FHA insured 12.1 percent of all mortgage originations in 2018, down from 13.5 percent in 2017 and a peak of 17.9 percent in 2009, just after the housing crisis. During a good economy and housing market, more traditional lenders are willing to provide mortgages to borrowers with lower credit scores and down payments.

This article originally appeared on USA TODAY: Fewer first-time home buyers likely to qualify for mortgages under tougher FHA standards