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Minimum Lender Credit Scores for Borrowers Are Higher than Required by FHA

Many current renters are being priced out of the local Northern Virginia rental market because of increasing demand.  These renters realize that in many instances they could be paying less for the same house if they owned it.

A lot of you make more than adequate income from the jobs and careers that you attend on a daily basis.  Income is not one of your limiting factors.

a tri-merged credit report with FICO scores

Maybe you haven’t been able to save enough to take advantage of any loan program except for the FHA with only three and a half percent (3.50%) down payment required for a purchase of your new home.

Lenders require a 620 or 640 while FHA only requires 580 credit score.

With the rough spots in the economy over the past several years too many of you have found that your credit scores are a little light for obtaining the FHA insured low down payment loan.  Maybe your were unemployed for a short time.  Perhaps, someone was ill or hurt and couldn’t work.  Incomes dropped while your bills stayed the same.

In response to complaints filed by The National Community Reinvestment Coalition against 22 lenders the Department of Housing and Urban Development promptly launched an investigation.

“We thank NCRC for bringing these complaints to HUD,” said John Trasvina, HUD assistant secretary for fair lending and equal opportunity.

“For lenders to deny responsible home seekers this source of credit, without regard for their capacity to repay the loans, would raise serious fair housing concerns and, if proven, undermine our nation’s recovery efforts,” Trasvina said.

Minimum lender credit scores higher than FHA requirement

Many have raised their minimum lender credit score requirements to protect themselves from defaults and buyback risks.  They began raising them after the meltdown in 2007.  FHA loans with credit scores between 580 and 619 have twice the likelihood of default as those with credit scores between 620 and 679.  But 679 is not a bad credit score.  Especially with the recent economic slump from which we are only now beginning to recover.

Even the FHA has tightened its underwriting standards over the past year raising the minimum down payment to 10% for those with credit scores from 500 to 579.  Borrowers with credit scores below 500 can no longer qualify for FHA-insured mortgages (It’s amazing to me that they insure loans with credit scores that low).

NCRC’s chief noted that FHA’s high default rates and credit losses are due to legacy loans originated in 2006, 2007 and 2008.  It should also be pointed out that down payment assistance programs where borrowers had the seller make a tax deductible contribution to their down payment have also been reduced or entirely eliminated.  These programs were a source of high default rates.

Photograph: Casey Serin

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The Most Important Story Tomorrow January 12 2010

• Horizon Bank (HRZB) becomes the first failure of 2010 for the FDIC.  The bank, with $1.3 billion in assets, cost the Deposit Insurance Fund $539.1 million.  Horizon was a regional bank with extreme over exposure to Construction and Land Development (C&D) and Commercial Real Estate (CRE) loans — 1396% C&D and 3003% CRE. •  Total borrowing dropped again… Continue Reading

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