This alteration could make it easier for borrowers to qualify for mortgages, potentially leading to an increase in borrowers with better credit histories. The result could be a more robust mortgage market and increased access to homeownership opportunities.
The FHFA's action marks the first time since 1995 that the agency has changed its credit score requirements. The new requirement calls for lenders to consider credit scores of 620 or higher when assessing a borrower’s ability to repay a loan. This is a drop from the previous requirement of 660 or higher. The FHFA believes that this change will help more borrowers access mortgages, specifically those who may have been previously denied due to a lower credit score.
The primary benefit of such a move is that it potentially opens up the mortgage market to more borrowers. A borrower with a credit score below 660, but above 620, may now have a much easier time qualifying for a mortgage . Additionally, lenders may now feel confident lending to borrowers with riskier credit profiles.
However, this policy change could also come with some potential drawbacks. The most obvious is that borrowers with lower credit scores are more likely to default on their loans, which could lead to an increase in foreclosures. In addition, lenders may now face greater risk of loan fraud and abuse if borrowers are allowed to more easily qualify for mortgages with lower credit scores.
The FHFA is aware of these potential risks and has proposed some safeguards. Lenders must perform additional due diligence when offering loans to borrowers with scores below 660. Borrowers must also provide proof of their income and assets and demonstrate their ability to repay.
Overall, the FHFA's policy change has the potential to expand access to mortgages for many potential borrowers with lower credit scores. It is a promising step towards increasing homeownership opportunities, but it carries with it a certain degree of risk. Lenders must carefully consider these factors when assessing the potential risks of offering mortgages to borrowers with lower credit scores.
The Federal Housing Finance Agency (FHFA) recently announced a major policy change that could have substantial implications for the mortgage industry. This alteration could lead to an increase in borrowers with better credit histories, ultimately resulting in a more robust mortgage market. The FHFA's revised policy calls for lenders to consider credit scores of 620 or higher when assessing a borrower’s ability to repay a loan. This is a drop from the previous requirement of 660 or higher, meaning that more borrowers may now qualify for a mortgage.
The primary benefit of this change is that it opens up the mortgage market to more potential borrowers. Individuals with credit scores below 660, but above 620, may now have an easier time qualifying for a mortgage, providing them with greater access to homeownership opportunities. Additionally, lenders may feel more confident lending to borrowers with riskier credit profiles.
However, this policy shift does come with some potential drawbacks. Borrowers with lower credit scores are more likely to default on their loans, leading to an increase in foreclosures. In addition, lenders may now face greater risk of loan fraud and abuse if borrowers are allowed to more easily qualify for mortgages with lower credit scores. To address these issues, the FHFA has proposed some safeguards. These include additional due diligence on behalf of lenders when offering loans to borrowers with scores below 660, as well as providing proof of income and assets and demonstrating an ability to repay.
In conclusion, the FHFA’s credit score change has the potential to increase access to mortgages for many potential borrowers with lower credit scores. It is a major step towards increasing homeownership opportunities, but it also carries with it certain risks. Therefore, lenders must carefully consider these factors when assessing the potential risks of offering mortgages to borrowers with lower credit scores.
This article was contributed on Nov 23, 2023
