For the past eight months, I have been reading how the housing market is collapsing with record lows in sales, loan originations, first-time homebuying markets, and new construction. It all appears to point back to the deal the industry made with the devil when it sold its soul for sub-prime lending.
Since the collapses of the market, lenders and investors have tightened their lending criteria in order to strengthen their portfolio as a result of failing loans and repurchase demands. I don’t blame them; however, as a result of overcompensating in tougher underwriting criteria in order to have a stronger creditworthy borrower; the lenders have blocked the traditional Federal Housing Administration (FHA) borrower from qualifying for an FHA loan.
For years, FHA has been the loan of choice of first-time homebuyers, middle-income, and moderately-low income applicants. With today’s credit score-driven decision-making, the traditional FHA applicant does not qualify for the FHA loan due to the lender underwriting templates.
The average FHA loan credit score in 2006 ranged from 665 for an “Excellent” ranked loan, 654 “Good” and 603 for “Fair.” These rankings are a result of post-closing quality control performed on FHA loans.
►Excellent: No errors or a minor error.
►Good: Minor errors and will sell on the secondary market.
►Fair: Errors and questions with credit or collateral and may be challenged for a repurchase.
►Poor: Found fraud in the file.
The average FHA credit score today is “Excellent” 712, “Good” 695, “Fair” 691. As you can see, in less than five years, the difference in the average FHA credit score in 2006 and 2010 is 47 points in the “Excellent” ranking, 41 point in the “Good” ranking and 88 points in a “Fair” ranking.
Based on credit scoring, the FHA product is no longer the product of the average mortgage applicant. Borrowers who qualify for FHA loans today have above average credit scores. Because of the overcompensating underwriting criteria, many will not qualify for an FHA loan, such as minorities, young couples and single parents who have a reliable income stream, but have had some hiccups along the way.
If the mortgage industry wants to recover, make lending available to the average credit score borrower. Lenders should shoot for a average 688 for an “Excellent,” 674 for a “Good” and a 645 for a “Fair.” This recommendation is still high, but it’s a start in the recovery of the economy. Adjusting the credit score back down will do more for the mortgage and housing industry than any tax credit or stimulus.
2006
2007
2008
2009
2010
Excellent
665
663
675
695
712
Good
654
637
666
687
695
Fair
603
615
638
680
691
Poor
579
567
620
647
706
Tommy A. Duncan is executive vice president of Quality Mortgage Services LLC. For answers to your QC and FHA questions, please contact Tommy at (615) 591-2528, ext. 124 or e-mail
[email protected].
