The Federal Housing Administration (FHA) reviews and evaluates risk in an ongoing basis to ensure they can continue to support sustainable homeownership for the long term while maintaining the integrity of its insurance endorsements. Over the past few years, changes have been implemented to include increases in monthly mortgage insurance premiums (MIP) and/or the up-front MIP. These increases can be costly to consumers needing to utilize FHA financing for their home purchases or refinancing their current mortgages, so FHA recently implemented alternative options in an effort to reduce overall risk.
In Fiscal Year 2018, 25 percent of all FHA-insured mortgages had high debt-to-income (DTI) ratios — above 50 percent which was the highest percentage since 2000. The increase in higher DTI concentrations has continued in the early part of Fiscal Year 2019 with more than 28 percent having a DTI ratio greater than 50 percent. In addition to the higher debt ratios, there was a decrease in average credit scores to 670 for Fiscal Year 2018, the lowest average since 2008. In first quarter of Fiscal Year 2019, more than 28 percent of new mortgage endorsements had credit scores of less than 640, and more than 13 percent had credit scores less than 620 — nearly a 19 percent increase over Fiscal Year 2018.
The concern is the risk trend of credit scores less than 640 combined with DTI ratios greater than 50 percent.
In March 2019, FHA took action to offset this increased risk. Lenders utilizing an automated underwriting system (AUS) may receive feedback results for certain mortgages indicating they must be manually underwritten. Manually underwritten loans may impose additional requirements and restrictions that may vary from one lender to another.
A few examples of additional requirements/guidelines are as follows:
- Low payment shock (increase in housing expense) through verification of rent/current mortgage
- Additional income not used in qualification
- Reduced debt-to-income ratio.
FHA will continue to closely monitor the impact of these changes and will implement any additional changes as needed to maintain a better balance of managing risk while still fulfilling its mission.
Although FHA still remains a viable option for borrowers with lower down payments, lower credit scores and higher debt ratios, fewer borrowers may qualify for the loan program.
Dan Ranck, HomeSale Mortgage, LLC
Mortgage Loan Originator
Direct: (717) 271-2400 / efax: (866) 849-4320
email@example.com / www.danranck.com
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