New FHA Changes: Can You Still Qualify?

Certified Mortgage Advisor
NMLS 1701021
Published 
May 29, 2020

Loan changes for FHA

Now we're talking about FHA new loan changes, new loan requirements that are happening because of the Coronavirus pandemic. So what's ending up happening. Right now we're in a culture that is in shock. We're in a lot of fear. Things are changing rapidly and it's hard to keep up with what's going on.

Why loan requirements changes

Some of the difficulties that I've been seeing, especially with mortgage loans is that you're watching loan and mortgage videos is because you want to know information about mortgages, and you've probably looked at videos and sold loan requirements, and then you talk to a lender and things are different. That becomes very frustrating because the roles are shifted. And now it's like we, we went out and we looked for information, but that information wasn't helpful.

What we will discuss

So I wanted to update you on how this pandemic is impacting FHA loans. So I'm going to explain why it's happening and some strategies at the end that you can use to recover from the situation. All in all, just to summarize it real quick, there's nothing to be afraid of. This is something that we're going to get through and we're going to navigate this together.

Credit score minimum

So first the main changes that we're seeing are our credit score minimums. What lenders are doing is they are changing their credit score requirements to qualify for an FHA loan. So this is a big confusion that people are having.

Most minimums are 640 now

FHA has not changed anything. So we have credit score minimums being changed because it used to be a 500 score for most lenders who are writing directly to FHA standards. Now, most minimums are actually up to 640. So that takes a lot of people and makes it so that they can't qualify anymore. Some lenders are even going up to a 660, 680, some are even going to a 700 requirement to get an FHA loan.

Overlays

So what we need to keep in mind is FHA did not change anything. What ended up happening as lenders created, what they call overlays. So FHA did not change anything because of the pandemic FHA's minimum credit score requirement is still 500 for 10% down and 580 for 3.5% down overlays is what a lender does when they want to add a rule on top of FHA's rule. So basically an overlay is we if FHA says here's our rule overlay is where a lender kind of puts another rule on top of it and says, this is the rule for us.

So overlays vary lender by lender. Some lenders have overlays some lenders don't, and with the coronavirus, lenders have put on a lot of overlays on FHA loans. And I'll explain why here in just a little bit. So we have credit score minimums. That's something that you have to watch out for.

Reserve requirements

But we also have reserve requirements. Some lenders are adding reserve requirements. And that basically means you need money left over in your bank account after you close. It's normally anywhere between three to six months of reserves. So that means if your mortgage payment is going to be a thousand dollars a month, you need $3,000 leftover after you close on your loan. So that's after you pay your down payment and closing costs, you need that money leftover in the bank account.

Working with a mortgage broker

So here's the advantage of working with a mortgage broker. If you work with a lender, they can only lend on one pool of money. So if that lender says our credit score minimum is now 640, that's all they can do.

When you work with a broker, we have lenders that have a minimum credit score of 640, but we also have lenders who have a minimum credit score that is still 500 and they aren't putting overlays on their loans.

Look for a wholesale lenders down to 500

You want to look for is a broker who can get you a wholesale lender down to a 500 score. If you need to qualify with a credit score that low, you need to work with a broker who can connect you with wholesale lenders that do that.

One example of a lender that does this is Carrington. So you could talk with a broker and mentioned, Hey, this is what I need to do. Do you work with Carrington because we need to go down to that credit score. And so what we're ending up having to do is for buyers who even if they have, let's say a 639, 90% of lenders will not take somebody with that credit score right now on an FHA loan. So they need to go to a lender like Carrington, who can do those lower credit scores.

Low credit score? Expect to pay points

If you do have a low credit score, you're going to need to expect to pay points right now. Now points are basically prepaid interest. So what you do is you get an interest rate, what it does is lower the interest rate, but it costs more money upfront.

With these loans right now, FHA is just very expensive. That means normally an interest rate that didn't have any con. Now actually has a cost to it. It's because these loans are becoming riskier with FHA.

Verbal verification

Another requirement that you might run into is verbal verification. Multiple times of oral verbal verification is where a lender is going to call your employer and basically say, Hey, do, does this person. And they might even need an updated pay stub. And we're seeing some lenders requesting this 15 days beforehand, then 10 days beforehand, then another one, the day of closing, because there are so many job losses happening. Lenders want to ensure that up until the day of closing and even on the day of closing you still are employed and you're not being laid off.

Why this is happening?

So let's talk about why this is happening for just a sec. This kind of gets into bigger of a broader understanding of how the mortgage market works, but in essence, FHA loans are insured. So what that means is that when this loan gets bought from an investor like Ginnie Mae, what ends up happening is that the investor now promises that the loan is going to continue to have payments made out on it.

Insured loan, this is what happens

So basically your loan that's originated by a lender is then sold and packaged into a secondary market. In that secondary market, those investors are saying, Hey, no matter if this person pays or not, we're going to continue to pay you.

That's what it means when that loan is insured, the government ensures that the investors are going to get paid on it. That's how the government keeps the flow of money going. So now what happens if somebody doesn't make their payments anymore, that investor still has to payout. So now we're running into a big issue because we've had millions of people who have filed for unemployment.

That means millions of people who probably aren't going to be able to make their mortgage payments. That means millions of monthly payments, not coming into investors for them to send over to their other investors. What does that mean? That means somebody is stuck in the middle. These investors are stuck in the middle bleeding cash, monthly, and a lot of cash.

The reason FHA is stricter

So they don't want to originate these FHA loans because a conventional loan doesn't work that way on a conventional loan. If the borrower doesn't pay on that mortgage, the investor doesn't get paid. But on an FHA loan that payment still has to cycle through. So that's why people are getting more skittish of FHA loans with the pandemic that's going on and the unemployment crisis, they want to make sure that they're not going to be bleeding cash.

So what they're trying to do is tighten their restrictions so that they have more qualified people who have a higher chance of paying back that mortgage because of statistically lower credit scores or people with less risk. Aren't going to pay on their mortgage as much as somebody with a higher credit score or more reserves in the bank.

Reconnect with your lender

So what can you do if you're being affected by this? It's talking about some strategies here. You need to reconnect with your lender. If you've already been pre-approved or pre-qualified, you need to go back to your lender and say, Hey, is there anything that we need to re-look at? Because things have changed a lot.

You need to make sure that you still qualify with that lender. You don't want to go under contract and then find out that you don't qualify anymore. Also, keep in mind, your lender probably has a lot of pre-approvals that they're managing right now. And it's not always easy for them to go and talk to every single person and recheck every file. To reconnect with your lender and see if you still qualify, or if there's anything that needs to be changed.

Wait and increase score

Your second option is to simply just wait and increase your credit score. This is probably going to be the best solution. If you have some patients, if you don't really need to move right now, you just want to move. If you're there waiting and trying to increase your credit score is going to be the best plan of action for you.

Buy with high rate & streamline refinance

Then number three is to buy with a high rate and refinance with a streamlined loan when this is all finished. So what you would do here is you would buy, I would buy with the highest interest rate possible so that you can take the least amount of points possible.

There's no reason to buy down your interest rate right now because we're in an artificially expensive environment with FHA loans. You're going to refinance that thing probably in a year or two anyway. So I'd buy it at a high-interest rate with the lowest cost possible. Then do an FHA streamlined refinance where you don't need an appraisal. You don't need to go through income, underwriting, and everything like that. Refinance into a lower rate.

Everything will be alright, just have a plan

So all in all the changes can be frustrating, especially if you're going through this process and trying to learn everything that's going on and you talk to a lender and things are different, and it's all because of what's happening in the market. There are liquidity issues and there's uncertainty with what's going on in the stock market and the economy and the bond market.

Just know this is going to pass. This is something that we're going to work through, but you need a strategy. You need a plan in its place. So follow these examples, follow these strategies, and you'll be just, all right.

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