Each year millions of consumers look into FHA loans as an option for buying a home. Benefits such as low down payments (often as low as 3.5%), competitive interest rates, and higher limits make this mortgage extremely popular in the current market, however securing this loan also comes with a required minimum credit score of 640, which takes many of us out of the running.
Effective immediately, most U.S. lenders have lowered their minimum credit score requirement to 580. This opens the door for millions more Americans to take advantage of the opportunity the FHA is offering.
Why the Change in Policy?
The change in policy has more to do with lenders than with the FHA. This is because the Federal Housing Administration, which acts as the largest insurer of mortgage loans in the United States, stipulates in its guidelines that the minimum score for which a borrower can receive credit is 500. However the lenders, who actually loan the money, have additional restrictions known as “Investor Overlays” which help streamline the number of eligible applicants.
These overlays protect the lenders from offering credit to consumers with a high risk of default, however they also keep many with less than perfect credit from attaining a mortgage. Now that the domestic economy is improving, lenders are showing their confidence in consumers by lowering the required credit minimum.
The repercussions of the lenders lowering the required minimum is good news for everyone. More people are now eligible for mortgages, which means more people will be buying homes. Each home sold will continue to rebuild value in the U.S. housing market, which will in turn bring property values back towards what they once were.