Although the FHA offer less stringent qualification requirements for borrowers who may have a problem with their credit score, it does not mean that those within this less-than-stellar FICO range can actually qualify for the loan.
Why is this so?
According to the Urban Institute, around 1.1 million loans could have been processed in 2015 had reasonable lending standards been set in place. A large part of this issue with “reasonable lending standards” lies in lenders not issuing many of the government-backed loans as they were laid out by the insuring agencies.
For example, FHA loan borrowers, ideally, can qualify for an FHA loan with a FICO score of 620. But many lenders do not approve loans for borrowers with at least a score of 660. Why? Because these lenders are afraid that the cost of servicing will cost them more money than how much they actually earn from originating it.
And while the GSEs and their regulator, the Federal Housing Finance Agency have established actions to properly define what the lenders will be held responsible for in the underwriting process, the Federal Housing Administration is still yet to address the issue with lenders who drive business away and fail to abide by the original guidelines set by the administration. Much of this is attributed to the lenders’ fear of litigation that they beget from loans with existing misstatements.
The FHA does not do risk-based pricing, thus they are the ones who are more inclined to dole out loans for individuals with less-than-stellar credit. Meanwhile, GSEs and the FHFA who do so are less inclined to lower their standards. It is thus, the FHA who holds more power to give way and loosen their credit.
Why do lenders prefer to deal with the GSEs and FHFA? The high servicing costs and the litigation threats are pushing lenders away from the FHA, although the rates are still an effective bait for low FICO holders.
As a resolve, experts advise that for credit availability to expand, the FHA must only hold lenders responsible for their own errors and not for defaults.
A preferred option
Still, despite all the lender squabble, borrowers are still leaning to FHA loans as their mortgage preference, or at least those who cannot make the conventional 20 percent down payment, even when their credit scores reach 700.
Whether the FHA will do something about this long-held dilemma soon or not, we are yet to see. But the pressure to is rising.