Are you a lender working with a wide range of potential home loan applicants? You can play a role in helping people in this situation. If you are working with a current renter who has been avoiding moving forward with a home purchase because of a FICO score, you may be in luck. So long as the borrower is able to handle monthly mortgage payments, the government is willing to give these borrowers a bit of a break. Under the Federal Housing Administration, these borrowers may be able to secure a loan with a minimal down payment.
This is mostly due to a big policy change in which national lenders have been more willing to approve mortgages for borrowers who meet FHA guidelines for underwriting, even if those same borrowers do not have great FICO scores. According to early research, it looks like new evaluation of these factors could open the door for as many as 100,000 potential homeowners who have previously been unsuccessful in securing financing because of FICO scores.
FICO scores begin with a low of 300 and go all the way up to 850, representing zero risk to a lender. For years, the FHA has approved applicants who have FICO scores somewhere in the 500s, but this is not true for many other lenders. Traditional lenders tend to shut out borrowers who have scores below 620 or 640, and this action has kept many who would otherwise qualify from getting a loan at all.
It’s not as if traditional lenders were avoiding these applicants outright, but these actions may have been done to protect their own future. In the past, lenders were subject to scrutiny or even penalties if the government agency deemed the lender to have extended too many loans to high-risk borrowers.
With this new policy in place, lenders will be judged more fairly. This means that companies in communities where a large portion of individuals have sub-par FICO scores to make those loans available without fear of repercussion from the FHA.
Some of the individuals most likely to have low FICO scores include minority households and first time buyers, but many of these applicants could also meet other requirements for getting a loan. It is expected that this new policy change will significantly open the door for a whole group of individuals to move forward with a home purchase, so long as lenders take interest in what this policy change means for them. Many people who lost their jobs during the recession took a hit on their FICO score but have been working to improve it while also saving money for a down payment. This policy shift represents a lot of potential for the housing market and people who had previously been unable to secure a home loan.