While the federal agency that insures mortgages for first-time homebuyers recently tightened its standards over concerns about too many risky loans being extended, local mortgage experts say the move will have little impact on the Baton Rouge market.
The Federal Housing Administration, according to The Wall Street Journal, told lenders it would begin flagging more loans as high risk, meaning those mortgages—extended to borrowers with low credit scores and high loan payments relative to their income—will now go through a more rigorous manual underwriting process.
The FHA decision could mean fewer first-time homebuyers will be able to secure mortgages. The change, though, is intended to ease concerns that lenders are making loans to borrowers who can’t repay, resulting in a spike in defaults that strain FHA reserves.
In Baton Rouge, however, mortgage brokers say the decision hasn’t had much of an effect on their handling of first-time homebuyer loans, likely because the change just went into effect this month. Regardless, they add, the tighter standards will only apply to a small percentage of homebuyers.
“We have not seen it impact our underwriting standards here,” says GMFS President Tee Brown, adding, though, that it could change. “It’s always a fluid market.”
The FHA’s move is a reversal of its 2016 decision to loosen underwriting standards, in which the agency removed a rule requiring manual underwriting for mortgages with credit scores below 620 and a debt-to-income ratio above 43%.
But it’s rare for people with such low credit scores and high debt-to-income ratios to apply for mortgages, says Assurance Financial owner Kenny Hodges.
“You don’t see a lot of those folks applying for mortgage loans,” Hodges says. “It will affect a very small percentage.”
What the change will do is require borrowers who fall into that category go through a manual underwriting process, rather than the automated process for approval. That’s not to say they won’t be approved, Hodges said, but they will be open to more scrutiny.
“If they have bad credit, it’s not a bad decision to want to scrutinize it a little closer,” he adds. “Not that you can’t approve it.”
Nationwide, an estimated 40,000 to 50,000 loans a year could be affected, or about 4% to 5% of the FHA-insured mortgages originated annually in recent years, according to Keith Becker, the agency’s chief risk officer.