Loan Modification

FHA guidelines: Why FHA approved lenders need to play by the rules

By Karen Lawson

We’ve previously commented on the phenomenon of “investor overlays,” which occur when FHA lenders require higher credit scores or more stringent underwriting criteria than FHA requires. Requiring higher credit scores and enforcing more stringent underwriting criteria means approving fewer FHA loans for borrowers. With housing markets in steep decline in many areas, the combination of low home prices and FHA home loans promote accessibility of both affordable homes and home loans. Last week, we addressed plans for a national community advocacy agency to “call out” the practice of investor overlays as discriminatory against minority borrowers. Although alleged lending discrimination is bad enough, the results of tightening credit requirements on FHA loans spreads far and wide.

FHA guidelines: FHA provides most financing for first time buyers

First time buyers are often cash-challenged; they may not have enough cash for covering a 20 percent down payment and closing costs as required for conventional mortgage loans. FHA offers qualified borrowers an opportunity to get a home loan with a minimum down payment of 3.5  to 10 percent, depending on their FICO credit scores.

FHA lenders: Loyal to FHA mission, or Wall Street?

It seems that some FHA lenders, after receiving their federal bailouts, remain solely concerned with reducing risk and maintaining their street cred with Wall Street. Kenneth R Harney, writing for the Washington Post, cites Brian Chappelle, a consultant to the financial industry and partner in Potomac Partners, LLC, as noting “reputational risk” as a concern for FHA lenders fearful of having low credit score FHA loans fail. What is their risk when mortgage loans approved for well qualified borrowers also go south? In these times, foreclosure, bankruptcy and bad credit are equal opportunity realities for all income brackets. The consequences of late payments, foreclosure, and bankruptcy can linger on consumer credit reports for three to ten years.

Recession causing credit problems, but providing affordable home purchase opportunity

FHA borrowers shouldn’t suffer due to squabbles between FHA and its approved lenders: FHA can require mortgage lenders and servicers to reimburse them for losses associated with poor mortgage underwriting and mortgage servicing errors. In the majority of cases, FHA lenders receive full reimbursement for foreclosure losses, as FHA pays lender claims for losses and usually also pays lenders to transfer title to foreclosed FHA properties to HUD/FHA. Mortgage lenders found to be negligent in following FHA guidelines should pay the consequences, instead of passing them on to potential FHA borrowers who meet FHA guidelines for FHA mortgage loans.

Housing markets continue to be depressed in many areas of the US. Although bad news for the economy in general and homeowners in particular, the current combination of low mortgage rates, lower down payment and credit scores required by FHA, and low home prices is providing more opportunities for buying affordable homes.

Full post as published by FHA Mortgage Guide on December 06, 2010 (boomark / email).