When the Federal Housing Administration unveiled new policies Wednesday on its loan insurance program, some local lenders were relieved that the changes wouldn’t kick them when the housing market was already down.
That's because many lenders had already put in place stricter borrowing policies than the ones announced by FHA, which insures loans, primarily for borrowers who have problems getting prime loans.
After the subprime loan market collapsed in August 2007, many lenders went out of business and traditional sources of cash to fund mortgages was tight. That prompted lenders to ratchet up standards on who can borrow, because they didn’t want to be left holding delinquent loans or having their FHA licenses yanked for high default rates.
“FHA has been behind the curve a little bit,” said Steven A. Milner, owner and chief executive of Mortgage Concepts, a Bohemia-based lender. “FHA to some degree has become a subprime dumping ground, and we have to try to avoid that by increasing the requirements.”
Milner said he does not make loans for borrowers with credit scores of less than 620. FHA’s new policies call for borrowers with 580 scores to pay at least 10 percent down; for everyone else, the down payment can still be as low as 3.5 percent, which has been a big reason for many house hunters to get an FHA-backed loan.
A lot of the lenders who would have given loans to people with low credit scores are out of business, so it’s been almost impossible for borrowers with 580 or lower to get loans.