More Lenders Set Minimum 580 Score on FHA Loans
A few more lenders set a minimum 580 credit score this week on FHA mortgages. My prediction that this would spread through the industry is coming true. “FHA The New Subprime” - lenders are protecting themselves from this thought the only way they know how - minimum credit scores.
Once a few of the national wholesale FHA lenders set this minimum the rest are almost forced to follow. The last man standing so to speak, will receive an imbalance of loans under a 580 shifting their portfolio.
Think about it this way:
There are 5 FHA Lenders in the world and 1,000 FHA loans and 50 of them are under a 580. All of the lenders are happy at a 5% rate of loans under 580. Suddenly the number of FHA loans under 580 jumps to 100 - 10%. Each lender is getting 200 loans and 20 are under a 580. Suddenly lenders 1 and 2 decide they don’t want loans under 580 any longer - so the 40 low credit score loans they were getting move to lenders 3, 4 and 5. Lender 3-5 are now each getting 213 loans and 33 are under a 580 - they just jumped up to 16%. So lender #3 gets spooked because low score loans jumped above 15% and they stop taking them. This pushes more loans to lenders 4 and 5 - 250 loans each and 50 are under 580 that’s 20%! Finally lender 4 gives it up and the last many standing is getting 300 Loans and 100 are under a 580 - 1/3 of their FHA Production, up from only 5% a few months prior.
Once a market move like this happens it is only a matter of time before it effects everyone.