The country’s two biggest mortgage lenders have raised their standards for Federal Housing Administration loans. Weeks after the FHA increased its minimum FICO score requirement for its low down payment loans to 580, Wells Fargo and Bank of America increased their minimum FICO score requirement for FHA loans from 620 to 640. These large lenders, including several others, increased their minimum score requirement to 620 in the first months of 2009.
With the higher minimum, the already struggling residential real estate market has an additional hurdle to overcome, as FHA loans cover about one fifth of all home purchases in the country. Real estate professionals wonder when the housing market will finally recover, as trouble after trouble continues to beset the sector. According to FICO, only about 6.3 million Americans, or about 3.7 percent of all consumers in the credit database, have scores of between 620 and 640.
In the third quarter this year, Wells Fargo topped all other lenders in mortgage origination volume with over $100 billion worth of home loans during the quarter. BofA, meanwhile, was the biggest lender in terms of mortgage servicing, which involves collecting monthly loan payments and distributing interest earned from the loans to investors.
In October, BofA was one of the first banks to suspend foreclosures in a number of states following complaints about its foreclosure procedures while Wells Fargo took time in insisting that its mortgage paperwork was thorough and that it was continuing its foreclosure proceedings. Subsequently, however, Wells Fargo bowed down to pressure from many sectors and decided to look into the paperwork of thousands of its mortgage loans.
According to the FHA officials, the decision of BofA and Wells Fargo to push up their minimum score to 640 excludes about 15 percent of potential FHA borrowers from buying homes. As government-backed loans increasingly become the choice of homebuyers, the tightened standards will cut down homeownership dreams, particularly those whose scores were battered largely because of the recession.
Since 2008, when the housing meltdown forced banks to retreat from aggressive mortgage lending, the FHA, Fannie Mae, Freddie Mac and the Veterans Administration have been the ones providing most of the new mortgage loans. For the 12-month period ended July this year, 20 percent of all house purchases used FHA loans, and in the 12-month period ended September, FHA loans accounted for one third of all home purchases by first time homebuyers.
FICO scores range from 300 to 850, calculated by the three credit bureaus Equifax, Experian and TransUnion based on data that include percentage of credit card balances in relation to credit limits, length of credit history, and missed loan payments.
Although the higher FICO requirements for FHA loans are a bane to homeownership, some analysts say they could become the bitter pill needed to help treat the housing sector.