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Federal Housing Administration Eases Credit Limits for Mortgages

Updated on September 4, 2015

FHA Rethinks Tight Credit Limits After Recession

A new policy change by the Federal Housing Administration is making it easier for home buyers with questionable credit scores to qualify for mortgages.

The new policy gives lenders more discretion to grant home loans to borrowers who qualify under FHA underwriting guidelines but would have been disqualified previously by low FICO scores, according to a report by The Legal Forum (www.legal-forum.net)

Financial analysts say up to 100,000 more borrowers could qualify for mortgages.

Until now, lenders have avoided granting loans to anyone with a FICO score below 640 on the scale that runs from 300 to 850. They defended their credit score limit by saying the FHA could penalize them if they granted too many “high-risk” loans.

The new FHA policy allows lenders to grant mortgages to persons with lower-than-average FICO scores without penalty if a large percentage of their local community is made up of residents with poor credit. Typically, they consist of young adults, first-time home buyers, minority households and moderate-income working families.

Applicants for FHA loans still will need to meet the old underwriting standards, which include a reliable income, acceptable debt-to-income levels and a secure ability to repay.

However, now they can qualify for mortgages even if their FICO scores are in the upper 500s to low 600s.

Mortgage Bankers Association officials say borrowers with the lower FICO scores might not get accepted by all lenders. Nevertheless, their chances of finding at least one FHA lender after applying in several places is greatly increased under the new guidelines.

Bankers say lenders are most likely to phase in the new policy slowly, only after they have seen whether the FHA penalizes lenders who grant loans to borrowers with lower FICO scores.

The new policy is intended by the Federal Reserve Bank as a reprieve from the tight credit limits imposed as a reaction to the recession that started in 2008.

A Second Chance at Mortgages

The Federal Housing Administration is trying to give people with low credit scores another chance at home ownership.
The Federal Housing Administration is trying to give people with low credit scores another chance at home ownership.

Should Credit Limits Be Relaxed?

Should the Federal Housing Administration Allow Lower Credit Scores for Home Buyers Seeking Mortgages?

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    • MarleneB profile image

      Marlene Bertrand 23 months ago from Northern California, USA

      That's good news. Oftentimes, agents see the score and that's as far as they go. I think a person's ability to pay should be based on factors along with and not strictly on the score. I am glad the FHA is loosening up a little bit.