Disturbing Trend as Credit Scores Decline for Homebuyers Seeking FHA Mortgage

Family looks over mortgage

The housing crisis of the late mid to late 2000s pushed the financial situation of the United States into a tailspin. Combined with the crash of the stock market and a number of bubbles bursting, that was one of the worst financial situations to ever hit the country in its history.

While the housing market has recovered nicely over the past decade the FHA is looking to safeguard the economy by putting in place stricter requirements in order to qualify for a mortgage.

There will always be some financial leeway for first-time home buyers, the Federal Housing Administration wants to avoid potentially risky mortgages, as these mortgages mean trouble not only for the recipient, but of the banks, and communities where a risky, and possible foreclosure takes place.

Cracking Down On Low Credit Score Mortgages

Individuals with a low credit score and low income levels have often turn to the Federal Housing Administration for assistance when looking to buy a home. That is because the FHA provides significantly discounted interest rates on mortgages for low income individuals with a credit score as low as 580. In order to qualify for a traditional mortgage you typically need to have at least a 700.

However, the new crack down on low credit score mortgages looks to prevent the approval of certain mortgages in regions around the United States.

Why The Crack Down?

The FHA is looking to reduce risky mortgages for a number of reasons. While the government agency does want to avoid a rehash of the housing bubble, the agency is monitoring housing market trends throughout the country. Some of the markets are starting to bubble up, which increases the chance of risk when lending. Due to the bubbling market the FHA wants to avoid putting individuals with low income and poor credit scores into these communities, as if they begin to default on their mortgage it can cause catastrophic problems for the entire community.

Credit scores have continued to decline since 2011 for FHA mortgage applicants. The average in 2018 hit 670, which was the lowest it has been in seven years. Additionally, in the first quarter of 2019, 28 percent of all FHA applicants have a credit score of below 640, with 13 percent of applicants below 620. That is a 29 percent increase in the poor credit scores from the previous year.

Returning to Normalcy

The tighter standards are currently going into effect. While this may be unfortunate for you if you have a credit score in the low 600s, the FHA is not suddenly boosting the credit score requirements out of the blue. In fact, the FHA had reduced the necessary credit score back in 2016 for first time home buyers. So the new credit requirements are returning back to similar numbers of what it would have taken to apply for a home in 2016 through the FHA.

If you are interested in buying a new home, you need to keep these stricter regulations in mind. While it may come across as frustrating at first, the FHA mortgage crack down is designed to avoid a similar mortgage crisis from a decade earlier.

The best course of action is to do what you can to shore up your credit score before attempting to qualify for a mortgage. Doing this might push your potential home buying back several months, if not a year (or more), in the long run you’ll be better off.

That’s because an improved credit score will:

  • Cut down your interest rate
  • Increase the number of lenders you qualify with
  • Give you more time to save up a larger down payment.

What Mortgage Rates Do I Qualify For? Find Out Here