Will FHA Require a 620 Credit Score in 2008?

Will FHA Require a 620 in 2008?

I shall answer this question with deliberate ease, a bit of caution, a tad of apprehension. Over the years, I have stood proudly from my mortgage rooftop and boasted that FHA is a great loan for the credit challenged borrower, the first-timer, the borrower seeking a second chance to start over. “Who do you have for me this time, Juanita?” my underwriter always ask when I plop down in front of her to state my case. She braces herself, for experience has taught her that I attract those that have a “make-me-cry” story, a credit score that could be as low as a 447 (closed 2 weeks ago). And so I dribble on and present my case and 9/10 times, if I believe strongly in a borrower, the final scene of this saga plays out at the closing table. “Call me afterwards and jingle those keys in my ear,” I tell these ecstatic borrowers if I cannot attend their closing. Ahhh, the jingling sound is like music to my ears. No words need be said. They know and I know that we have defeated the odds, that the other lenders were wrong; their family and friends who said, “just wait a while” were wrong. They fought the good fight—and won. The single mom now has a home for her three kids, not a cramped apartment without a backyard. I have tracked many of these borrowers and their payment history and they have proven over the years that they were worth the effort and time to get them closed. Add to that, they are always an excellent source of referrals for me and my agents.

Now times are indeed a-changing. For those who are unaware, FHA has developed a new risk-based structure. Among the many changes that will go into effect in 2008, the standard upfront mortgage insurance (1.5% of the base loan amount) will now range from .75% of the loan amount for lower-risk mortgages up to a maximum of 2.25% for those considered high risk. Credit scores will be used to determine risk; in fact the HUD notice (dated 9/20/07**) that announces this change must be copied and studied so that you fully understand this new change and its impact. The most significant change is this: borrowers who cannot obtain a downpayment from their own funds or a family member must have a 620 credit score in order to qualify.

If you’re like me, you’re asking other questions. Here are some other key points I’d like to bring to light.

Ø When will this change occur? Originally the change was scheduled for January 1, 2008, but according to the Washington Post, “On December 4, 2007, HUD announced it is temporarily delaying the implementation of the risk-based premium rule for up to 60 days.” FHA Commissioner Brian Montgomery said, "It's good to have breathing room to let Congress work something out and let banks adjust their systems to the new rule."

Ø If the borrower has no credit score, they must have a downpayment of at least 5% of their own money to qualify for FHA-insured financing and will pay 2.25% upfront. These borrowers can lower the premium to 2.0% by making a downpayment of 10% of their own money.

Ø If there are two borrowers, don’t think of the “decision score” as you would a conventional loan (i.e. the lower of the 2 scores). FHA will average the two decision scores with hopes that a higher percentage of borrowers will receive a reduced premium.

Ø If a borrower is a first-time homebuyer who has received pre-purchase homeownership counseling, the maximum upfront premium is 2%, even if their credit score would fall into the 2.5% category. Agents, make sure your borrowers receive this counseling prior to execution of the sales contract.

It's time for first-timers to attend credit workships and homebuyer seminars BEFORE you sign a contract.