As volume dips more and more lenders are trying to reach out to new borrowers. For example, South Pacific Financial Corporation (SPFC) has announced a credit enhancement to its Federal Housing Administration (FHA) guidelines. Effective January 20, 2015, there will be no minimum FICO score necessary with loans that meet FHA system approval.
“As long as a borrower receives an automatic approval through the FHA’s automated underwriting system, there’s no FICO score requirement,” said Michelle Millwood, AVP Underwriting Manager at SPFC, and a member of the team that helped develop the new product guidelines.
“This program brings a great deal of relief for the most underserved of all borrowers — those currently with FICO scores below 620,” said SPFC CEO John Johnston. “We’re excited to launch this new program knowing most lenders want to see a credit score of 620 or higher on their FHA loans. Not so at SPFC.”
Giving the housing market a much-needed boost
“This is something much needed in the housing marketplace,” said Dan Manginelli, SPFC Executive Vice President. “I think we’re opening up a lot of possibilities for borrowers who may have had some hiccups in their past. And though they’ve gotten past that, their credit scores don’t reflect that yet. This new program is here to help them.”
How underserved is the market for those seeking to purchase a home with a FICO score of less than 620? Fannie Mae says loans with a FICO score of less than 620 currently account for only 1% of its business.
The numbers at Freddie Mac are slightly higher. As of December 2014, about 3% of its single-family portfolio had a FICO score of less than 620. Conversely, those with a higher FICO score above 700 accounted for 78%.
Data shows FICO requirements trending even higher
As if the headwinds weren’t strong enough, recent trends show FICO scores are inching upward.
According to a recent NAR survey, the market for borrowers with FICOs between 620 and 720 shrank from 95.7% to 80% and the willingness to lend to this group declined by 15%.
The median FICO score for FHA loans has been rounding up as well. According to a recent Mortgage News Daily article the FHA’s median FICO score at origination has climbed from 645 in 2007 to its current level at 684.
Given this lending environment, first-time homebuyers are feeling the crunch. According to NAR’s 2014 Profile of Home Buyers and Sellers, the share of first-time buyers fell from 38% in 2013 to 33% in 2014. That’s the lowest level in 27 years.
“This makes for a tough lending environment, especially when you consider that more than a third of all consumers have FICO scores below 650,” said Johnston. “Many of those are being left out of the current housing market. We’re here to help turn that around.”
About The Author
Tony Garritano is chairman and founder at PROGRESS in Lending Association. As a speaker Tony has worked hard to inform executives about how technology should be a tool used to further business objectives. For over 10 years he has worked as a journalist, researcher and speaker in the mortgage technology space. Starting this association was the next step for someone like Tony, who has dedicated his career to providing mortgage executives with the information needed to make informed technology decisions. He can be reached via e-mail at email@example.com.