I just read an article in the real estate journal Risk Media about possible changes in the lending world that would greatly impact first-time homebuyers. The article stated that these buyers could soon have a harder time obtaining a loan.
According to another recent Wall Street Journal article, the Federal Housing Administration will begin implementing stricter standards for loan approvals, possibly affecting up to 50,000 loans annually. Keith Becker, the agency’s chief risk manager, said, “We have continued to endorse loans with more and more credit risk. We felt that it was appropriate to take some steps to mitigate the risks we are seeing.”
The FHA typically insures consumer loans with low credit scores and lower down payment minimums. Their backing provides lenders with insurance against these less-than-ideal borrowing standards, reducing the risk of their loans. This means the FHA will flag more loans as “high-risk,” requiring more comprehensive manual underwriting to minimize the chances of a loan default.
They’ll also be looking more closely at mortgages with debt-to-income ratios above 43% and credit scores below 620. According to an FHA letter, this decision came as a result of multiple factors that signaled risk, such as cash-out refinances increasing 60% in 2016 and the average credit score dropping to its lowest point since 2008. Loans with credit scores under 620 have increased as well. All of those factors add to the risk taken by the FHA.
Federal Housing Commissioner Brian Montgomery has said publicly that the FHA must seek the right balance between managing risks and fulfilling its mission of supporting sustainable ownership. For long-term success, the FHA must maintain the integrity of insurance endorsements and they will continue monitoring credit ratios and income trends to determine if additional changes are needed to manage risk.
What does this mean for buyers and sellers? If the FHA does indeed make things more challenging for first-time buyers, it may be wise for these buyers to purchase as soon as they are able. It may also be wise for sellers to sell while there are still plenty of qualified buyers out there.
If you have any questions for us about buying a home, selling a home, or real estate in general, don’t hesitate to reach out via phone or email. I look forward to hearing from you.