High Risk Trends FHA Is Evaluating Closely
In its letter dated March 14, 2019 (FHA INFO #19-07) sent to all FHA-approved mortgagees and servicers, it was announced that the FHA is tightening down on its lending requirements, so here are the three criteria that they are closely monitoring. If a buyer is weak in all three, then FHA will not likely grant a loan approval.
Debt – An explosion in the debt-to-income (DTI) ratio of borrowers in 2018 has moved this criterion to one that will have a high focus. According to the FHA, “almost 25 percent of all FHA-insured forward mortgage purchase transactions in FY 2018 were comprised of mortgages where the borrower had a DTI ratio above 50 percent, the highest percentage since the year 2000. The increase in higher DTI concentrations has continued in FY 2019, with more than 28 percent of January endorsements having a DTI ratio greater than 50 percent.“
Credit Score – Credit scores are falling. According to the FHA, “a decrease in average borrower credit scores to 670 for FY 2018, the lowest average since 2008. This decline has continued in FY 2019 as more than 28 percent of new forward mortgage endorsements in the first quarter of FY 2019 had credit scores less than 640; and more than 13 percent of new forward mortgage endorsements in the first quarter of FY 2019 had credit scores less than 620, nearly a 19 percent increase over the FY 2018 concentration.“
Cash-Out Refinances – Low equity is the foundation of the FHA loan product, but the loan used as a refinance device for pulling out cash has become an area of concern. According to the FHA, “A growth in cash out refinances as a percentage of both its overall business and its refinance endorsement volume. In FY 2018, the portfolio experienced an increase of more than 60 percent in cash out refinances as a percentage of all refinances.“
As the year progresses, we expect to see FHA getting tougher. So what does that exactly mean? Expect to see buyers need higher credit scores, lower debt-to-income, and/or more of a down payment. The most likely scenario is one or more of those factors for sure.
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