The number of cash-out refinances, the average borrower credit score, and borrower debt-to-income ratios are all risk factors the FHA says it examines when evaluating how they score a borrower on their TOTAL Mortgage Scorecard. Recently they took a look and noticed that a few disturbing trends.
An increase in cash-out refinances, sinking average borrower credit scores, and rising debt-to-income ratios has the Federal Housing Administration concerned and triggered them to take steps to help mitigate risks to its single-family home portfolio.
The FHA has said that in 2018 the cash-out refinances increased 60% and that the average borrower score dipped to 670, the lowest average since 2008. Also noted was that nearly 25% of their FHA loans had a DTI ration above 50%. If you aren’t familiar with DTI, it’s what mortgage lenders use a measurement to determine a borrowers ability to repay debts. Specifically looking at how much income to they make each month compared to how much debt they must pay each month including their mortgage payment. Other loan programs consider 43% or less an acceptable ratio.
“Federal Housing Commissioner [Brian] Montgomery has publicly stated numerous times in recent months that FHA must seek the right balance between managing risk and fulfilling its mission of supporting sustainable homeownership,” the FHA’s letter stated. “To be successful long term, FHA must maintain the integrity of its insurance endorsements.”
However, mortgage brokers and lenders are concerned that the updated requirements may shut out some homebuyers.
The new changes to the system may flag some already existing loans for a manual underwrite. Loans that have been assigned a case number on or after March 18th are subject to the new changes. This means that some lenders will have these FHA loans in their pipeline and if you are a borrower who was approved within the last month you should check with your lender to make sure your loan is not affected.
Keep in mind that not all lenders do manual underwrites and if your loan was flagged you may need to switch lenders.