The standards for home mortgage qualification may have significantly stabilized since the end of the Great Recession but this may only apply to those with credit scores of more than 700, according to analysts. For those with what some might consider good credit, there still remain fees and extra costs that create limitation in the home-loan market.
The option of higher-cost Federal Housing Administration (FHA) mortgages has become the redirecting option in place for those with minimal credit issues. The issue here is these mortgages used to be reserved for those with low incomes and poor-credit borrowers, but are instead being used to accommodate minor credit issue applicants.
FHA loan costs remain soaring with high upfront fees for private mortgage insurance, as well as monthly insurance payments that will remain the same over the course of the loan period even if there is any improvement in the borrower’s payment record or home equity.
Middle-class borrowers have felt the burn of these high premiums, paying amounts up to thousands in extra costs, rather than qualifying for low-cost mortgages.
Even having scores of 620-700 would not help qualify for low-cost mortgages backed by Fannie Mae and Freddie Mac, which have a history of buying or guaranteeing more than half of the nation’s mortgages. Only an average 1 in 6 loans they’ve written have gone to middle-tier borrowers in the first 3 months of this year.
The loans have been almost exclusive to “older, wealthier, white borrowers” at a higher rate according to Mortgage Bankers Association President David Sterns, a former FHA commissioner. This has been seen as an overreaction to the mortgage-credit debacle that triggered a global financial crisis, according to many experts.
Officials at Fannie, Freddie, and the Federal Housing Finance Agency (FHFA) have tried to encourage lending to lower income and minority borrowers by a reduction in certain fees and beginning to accept down payments as low as 3 percent.
Melvin Watt, director of the FHFA, has argued it wouldn’t stop lenders from implementing higher credit standards than is required. “The message we have tried to send is that we need to find a way back to responsible lending to creditworthy borrowers across all market segments.”
The companies are imposing extra charges on loans to borrowers with lower credit scores and down payments, which translate into higher interests rates, in order to compensate for the extra risks set in place. Lenders are also feeling the brunt of legal expenses related to housing-boom-era mortgages and are imposing overlays on these borrowers.
These consumers can seek out quality credit repair firms to see if improvement from fair to excellent credit score is possible.