Mortgages secured by the Federal Housing Administration could become harder to get for some first-time home buyers. FHA loans have long been the popular choice for first-time buyers, because they allow low down payments, lower credit scores and higher debt-to-income ratios. About 83% of all FHA loans originated in January 2019 went to first-time buyers.
But after a recent risk analysis, the Federal Housing Administration has grown concerned about the credit quality of post-recession mortgages. Over 25% of FHA mortgages issued in January 2019 had loan-to-value ratios near or above 50%. These same loans had credit scores below 650. These borrowers also had minimal down payments. Statistically, this combination presents a higher risk of default.
To balance things out, FHA has changed the underwriting process for higher-risk applications. Instead of automated underwriting, which is the current industry norm, certain loan applications will require manual underwriting. (A painstaking, time-consuming process.)
This could result in an instant denial for some first-time home buyers. Few lenders today have the capacity to conduct manual underwriting. Even if they did, the odds of the loan being salable to the secondary market are slim. Industry analysts estimate that 10% to 30% of all FHA applicants will find themselves out of luck. In other words, if your FHA loan application isn’t strong enough to be approved through automated underwriting, your chances of gaining approval through a manual process are pretty darn slim.
It isn’t all bad news, though. FHA mortgages are still an option if you have less-than-stellar credit, or some other issue that makes a Conventional mortgage problematic. But if you have more than one “weak spot” in your financial picture, step back and improve your situation before applying for a mortgage. Your chances of mortgage approval will improve, and you’ll be eligible for a better interest rate, too!
StartingPoint Realty – serving first-time home buyers since 2004!
StartingPoint Realty proudly serves first-time home buyers throughout Chicago and the Northwest suburbs. Get an introduction to home buying by attending our free home buying seminar! There’s no sales pressure and no obligation. Space is limited, so please register your choice of location and date to reserve your seat!
Always feel welcome to contact us for help with your Chicago home buying questions!
Ryan Gable Broker/CEO Starting Point Realty
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