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Lenders reduce required credit scores for FHA loans

The typical credit score of an FHA borrower fell last year -- good news for first-time borrowers. Above, an L.A. home on the market.
(Kevork Djansezian / Getty Images)
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Here’s some welcome news for first-time and lower-income mortgage borrowers: Home loans insured by the Federal Housing Administration are getting easier to come by.

The average credit score on FHA-backed loans declined steadily in 2013, Inside Mortgage Finance reported Wednesday.

The trade publication said FHA borrowers’ average debt-to-income ratio – a measure of how much of their earnings are needed to keep up with housing and other debt payments – rose noticeably as well. That’s another sign that banks have eased up a bit.

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The trend appears to be continuing, as actions by No. 1 home lender Wells Fargo & Co. illustrate. Since January, Wells employees have been allowed in some cases to qualify FHA borrowers for home-purchase loans with credit scores as low as 600. That’s considered subprime territory and down from a previous threshold of 640.

The FHA theoretically allows credit scores as low as 580. But lenders, buffeted by defaulted loans and demands that they buy back troubled mortgages that they sold, generally have set standards higher since the mortgage meltdown.

A Wells official said the bank consulted with the FHA’s parent, the federal Department of Housing and Urban Development, and with advocacy groups before making its decision.

“All loan applications are fully underwritten and documented, and borrowers must demonstrate ability to repay,” Wells spokesman Tom Goyda said.

Inside Mortgage Finance said Ginnie Mae, the government agency that issues bonds backed by FHA loans, had reported that as of January 2013 the average credit score on an FHA loan was 701, and the debt-to-income ratio was 38%.

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Last month, the average credit score was down to 680, while the average debt ratio had risen to 40.3%.

The average credit score in securities backed by Fannie Mae and Freddie Mac fell last year as well and the debt-to-income ratio rose.

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