Even FHA loans will require a higher credit score in order to qualify.
If you’re a prospective homebuyer with less-than-perfect credit, you may find you have a harder time qualifying for a mortgage – even if you’re opting for FHA loan.
Wells Fargo – currently the nation’s largest mortgage lender in the U.S. – has announced they are raising their minimum credit score requirements on Federal Housing Administration loans. The lender previously extended these loans to people with FICO credit scores of 600 or better. Under the new guidelines, borrowers would only be approved if their FICO score is above 640.
“We will be adding back the credit overlays so we make fewer loans that are close to [the FHA’s] most accommodative end of the credit spectrum,” said Wells Fargo CFO John Shrewsberry. “Those are the loans that are going to default and those are the defaults loans that we’re going to be arguing about 10 years from now and we’re not going to do that again.”
FHA loans are generally used by homebuyers who aren’t established enough to qualify for traditional mortgages, often young buyers and others who are applying for their first mortgage after years of renting. As a result, FHA approval standards are more relaxed than traditional loans – borrowers only need a down payment of 3% or more and can qualify in spite of lower credit.
However, while the FHA only requires consumers to have a 600 FICO credit score for approval, lenders themselves are within their right to impose stricter requirements to avoid high rates of default. That’s exactly what Wells Fargo is doing in this case.
“Credit score is one of the main determining factors used in mortgage application approval,” says Maria Gaitan, Housing Manager at Consolidated Credit. “Unfortunately, these new standards by the nation’s most prevalent lender could delay first-time buyers from achieving their goal of homeownership.”
Understanding how to enter the market successfully as a homeowner is a challenge for many first-time buyers who aren’t yet familiar with the purchasing and mortgage approval process. In addition to credit score considerations, things like debt-to-income ratio and down payment size also play a key role in determining whether a buyer gets approved, even with the lower standards of FHA loans.
With that in mind, Consolidated Credit encourages first-time buyers to reach out for help and get educated in order to increase their chances for success. First-time homebuyer courses are designed to show you the ropes, while personal counseling from a HUD-certified housing counselor can help you assess your specific financial situation to see if you’re really at the point where you’re ready to buy a home.