The nation’s second-largest mortgage lender recently raised eyebrows after suggesting it might stop making FHA loans.
JPMorgan Chase has already scaled back lending to lower-credit borrowers, citing the increased costs of foreclosure and regulatory action. But the firm’s chief executive went a step further in a conference call last week, noting Chase is “struggling” with whether to abandon the government-backed program entirely.
That comment may be more political posturing than a seismic shift in strategy, but it highlights the tension many lenders face between expanding access to credit and remaining financially competitive.
For prospective homebuyers, the good news is that Chase is swimming against the current. Lenders as a whole have loosened their credit requirements in recent months.
But borrowers can still run into hurdles depending on their lender and their own unique circumstances. That’s why it’s critical to fully understand your mortgage options while staying on top of your credit.
Know Your Credit
Lenders continue to lower their credit benchmarks as the economy rebounds.
The average credit score for all closed loans last month was 728, compared to 746 in June 2012, according to mortgage software firm Ellie Mae. That two-year drop has been more pronounced with FHA loans than conventional financing.
FHA loans tend to have the most lenient credit standards. Here’s a brief snapshot of the average FICO scores last month for the three major loan types:
- Conventional: 755
- VA: 708
- FHA: 683
But bear in mind two key facts. One is that these are averages. Two is that lenders set their own credit score requirements, which can vary depending on the company, your financial background and more.
It’s ideal to check your credit well in advance of applying for a loan – six months, or even longer – to work toward improving your credit score. (You can pull your credit reports for free once a year to check for problems that are lowering your score, and you can use a free service — like Credit.com – to monitor your credit score for progress.)
Bolstering your credit score can help you nab a great interest rate and boost your chances of loan approval. However, a score that’s just above subprime (typically at least a 620) could still get you into a home loan.
Some FHA lenders may even go as low as a 580 score.
That’s a big reason why it’s so important to understand your lending options.
Know Your Options
Borrowers seeking a conventional mortgage will typically need good to excellent credit and enough cash on hand to put down at least 5% of the purchase price.
The FHA program can help buyers with more pockmarked credit. But you’ll still need to muster a down payment of at least 3.5%. It’s certainly not an easy task, but most borrowers will be better served financially if they can spend more time working on their credit and assets to qualify for conventional financing.
FHA loans come with an expensive form of mortgage insurance that now lasts for the life of the loan. For some borrowers, that added expense is simply the cost of getting into a home now rather than years later.
Veterans and current military members may be able to utilize the VA loan program, which comes with no down payment or mortgage insurance requirement.
There’s no formula or flowchart to determine which loan is right for you. A veteran with sterling credit and enough cash to put down at least 20% will absolutely want to compare conventional and VA financing.
Talk with multiple lenders, and remember that credit and underwriting standards can and will vary. Just because one lender is ratcheting up requirements doesn’t mean your path will be any tougher.
In fact, in many ways, it’s getting easier by the month to secure a mortgage.
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