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Lenders soon to require minimum 640 scores on government insured loans

FHA/USDA score requirements set to increase
FHA/USDA score requirements set to increase
Ken Cook/Mortgage Lender

The numbers have been considered and tossed around for some time and now most lenders and banks are making the official move to raise FHA minimum scores to 640 from a current 620. While there will almost certainly be those who claim they can and will still offer insured loans below 640 the reality is they likely will not close or be extremely difficult to close - especially if the advertiser is a correspondent lender or mortgage broker.

With bankers and lenders everything is about risk. It used to be about risk and market demands but with what has happened over the course of the last several months the market no longer gets what it wants and, just as the author predicted four years ago, the lenders once again make the rules and the people must work within them.

Each lender has a different time line for roll out and with the exception of less than a handful of banks every one is going to the 640 point. Even those who will still be offering solutions for borrowers with less than a 640 middle score will be charging extra points to the borrowers. This means if someone with a 650 score receives a loan at, for example, 4.5% interest the borrower with a 638 score may pay 5.5%. While increased pricing does not mitigate risk it does, technically, create a profit drip to cover losses in that pool.

According to an indisclosued source in the secondary marketing department of a major national lender "loans below 640 have a 10% greater delinquency rate than loans with scores about 640". This means if the delinquency rate above 640 is 5% the delinquency rate below 640 is 15% and that's a big hit for any lender to take.

Make sure you are working with a lender who knows how to work with borrowers who have credit challenges because it is still getting tighter in some arenas of lending.  A select few lenders do have true in-house re-scoring systems to work with borrowers who have faced past issues but who are starting over or overcoming challenging times.