Lower FICO Scores Push FHA to Tighten it’s Underwriting Standards

The FHA told lenders it’s tightening underwriting requirements for FHA-insured loans because it’s worried that too many risky loans are being made, according to The Wall Street Journal.

The FHA said it will begin flagging more loans as high risk and that those loans would undergo a “more rigorous manual underwriting process.

About 40,000 to 50,000 FHA-insured loans made a year would be affected, or 4 percent to 5 percent of all FHA loans originated each year, the Journal reported.

The changes are effective for mortgages with case numbers assigned on or after March 18 and are being made by the FHA to address some concerning trends bubbling up in the market, which have led to an “increase in higher-risk credit characteristics” within its portfolio.

In 2018, the FHA insured more than 1 million mortgages for single-family homes. Meanwhile, the average FHA-borrower’s credit score declined in 2018, to 670 – the lowest level since 2008. Credit scores have continued to decline so far this year and have been on a downward trend since fiscal 2011.

According to the FHA, more than 28 percent of new forward mortgage endorsements in the first quarter had credit scores below 640, while 13 percent had credit scores below 620 – a nearly 19 percent increase over last year.

About 83 percent of the mortgages insured by the FHA in 2018 were first-time buyers.