Wells Fargo, one of the nation's largest originators of loans insured by the Federal Housing Administration, announced it is tightening its credit score requirements for borrowers looking to finance a home through the FHA program. Last year, Wells Fargo lowered its credit score requirement for FHA purchase loans to a minimum 600 FICO score. Now, it's 640, reports National Mortgage News.
By adding credit overlays (credit score requirements higher than the agency's standards) to FHA-backed loans, lenders will inevitably exclude potential borrowers from the programs designed to help them access home loans.
Loans insured by the Federal Housing Administration can be a great option for first-time homebuyers, because they allow borrowers to make low down payments and access financing even if their credit scores aren't fantastic. Because the FHA isn't originating these loans, borrowers are subject to the underwriting standards of the lender that originates their loan, which is why it's important for aspiring homeowners to shop around when seeking a mortgage, no matter what kind of loan they're looking for.
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Wells Fargo's decision to increase the credit score requirement on FHA loans stems from a concern among lenders that the Justice Department may begin cracking down on minor defects (like a debt-to-income ratio that's too high or an error in income calculations) in defaulted FHA loans. The FHA takes on the risk of lending to these borrowers, which is why mortgage originators lend to them in the first place, but a new proposal from the FHA that would require lenders to certify FHA-backed loans are without defect has lenders worried about future liability. Banks say the proposal lacks clarity, according to the National Mortgage News report, and they want to be sure they don't face lawsuits from the Justice Department over minor defects. Borrowers with lower credit scores are more likely to default, hence Wells Fargo's bump up in credit score requirements.
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