Good morning everyone,
I'm sure you have probably heard the news about the changes being made by FHA, but I thought I would give you a quick synopsis on the recent changes.
FHA has now approved our accepting and closing loans for borrowers with credit scores down to 500. Wells Fargo's minimum score up until this change has been 600. As you can imagine, with the additional risk involved with the lower scores, other changes have been put in place regarding down payment, source of funds, and possible required reserves. A quick review:
With credit score of less than 600, seller concession is limited to 3.00%
With credit score of less than 600, no gifts funds are allowed in order for the borrower to reach their minimum required investment
If I do not get an "approved" response when first decisioning the loan, the qualifying ratio is going to be limited to 31/36 (down from 31/43), and the borrower is required to have two months house payments in reserve after closing
If I do get an "approved" response when first decisioning the loan, the qualifying ratio is limited to 31/43 with NO exceptions
Credit score 500 - 579:
10% down payment required
Borrower must have two months house payments in reserve after closing
Borrowers down payment and cash reserves must be their own funds - they cannot be a gift
Credit score 580-599:
5.00% down payment required
Borrowers down payment must be from own funds - they cannot be a gift
If no "approved" initial decision, borrower will be required to have 2 months payments in reserve after closing
In my personal opinion only, these loan will still be a challenge. Lenders are taking on additional risk at a time when most are very much risk averse. I'm excited about the new opportunities for all of us, but I have no doubt there will be a learning process for a while on what will fly and what will not. I plan on sending out an another update next week on borrowers with no credit score and "non-traditional" credit
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