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Lower-income people tend to turn to the FHA for assistance because it has offered as little as 3.5 percent down for those with a credit score as low as 580 – while lenders for a traditional mortgage prefer a score in the 700 range.
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.
Additionally, the agency noted a growth in cash out refinancing in fiscal 2018, which is when a larger mortgage loan is taken out on an existing mortgage, and the borrower takes the difference between the two in cash.
More than half of FHA-insured forward mortgage purchase transactions during the last fiscal year were comprised of mortgages where the borrower had a debt-to-income ratio above 50 percent – another troubling trend that has continued into the current fiscal year.
The FHA said it will monitor the impact of the new changes and is prepared to implement additional reforms as it seeks to strike a better balance between managing risks while supporting sustainable home ownership.
There are concerns the reversal could keep some borrowers from obtaining financing from the agency.
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And despite challenging conditions – including high prices and a lack of inventory, more millennials are hoping to become first-time home buyers as they approach their late-20s and mid-30s. In fact, 21 percent of people between the ages of 18 and 34 said they planned to purchase a home in 2019, according to Trulia, compared with 14 percent last year.