Wells Fargo Lowers Credit Score Requirements for FHA Loans
A move by Wells Fargo Bank to lower the bar for certain government-backed mortgages is stirring hopes of home-ownership among people with credit scores battered by the recession. The San Francisco-based bank, which is the country’s biggest mortgage lender, said recently that it would begin accepting scores of 600, down from 640, for FHA and VA loans, which require as little as a 3.5 percent down payment.
JPMorgan Chase hasn’t said whether it will follow suit. Bank of America said “there may be cases” where it would accept a credit score “in the lower 600 range,” depending on the borrower’s ability to repay the loan.
“Credit is loosening up,” said Guy Cecala of Inside Mortgage Finance. “It was overly tight right after the credit crisis in 2008 and really had nowhere to go but looser.”
Banks are motivated to increase lending to home-buyers because of a decline in refinancing. Wells Fargo’s mortgage lending business was $50 billion in the fourth quarter of last year, down from $80 billion the previous quarter and $125 billion in the last quarter of 2012.
The FHA accepts scores down to 580 and even lower in some circumstances, but finding a lender to make such loans can be difficult and for people with damaged credit the loans can be costly. Wells Fargo is offering a 30-year fixed FHA mortgage at 4.25 percent, although mortgage insurance and fees bring the effective rate up to 5.837 percent.
Joe Gonzales, a metalworker who lives in a rented apartment in South San Jose, hopes he can qualify. “It’s getting really expensive here to buy a home, and the credit thing is really hard,” he said.
He said he needs something bigger for his wife and three children than his two-bedroom rental and has been thinking about moving out of state, maybe to Las Vegas, where homes are more affordable. “I need something that’s mine. It’s the American dream, bro. One thing about being American is buying a home.”
Gonzales said a loan officer ran his credit scores a couple years ago and “my credit score wasn’t that great. Since then, I’ve paid off a lot of stuff and my credit score has come up.” Last year he made good money on the metalworker’s job he’s held for seven years, “but it’s like I’m struggling.”
Wells Fargo spokesman Tom Goyda said the change is “an effort to increase access to credit, especially for first-time and low- to moderate-income buyers.” Borrowers will still have to meet underwriting requirements, which include a demonstrated ability to repay the loan.
The bank’s government-backed lending, which is mostly FHA but also includes VA and Rural Housing Services loans, accounted for about 26 percent of its lending for the first nine months of 2013, Goyda said.
But underwriting standards are still much tougher than they’ve been in the past 20 years, Cecala said. “Even with slightly looser standards, we’re nowhere near where we were before.”
On the other end of the credit spectrum, Bank of America has created a loan of up to $1 million that requires only 15 percent down from buyers who have had a history of home-ownership in the past three years, and are borrowing above the limits for conforming loans — currently $625,500 in the metro Bay Area.
Guy Schwartz of CMG Financial in San Ramon said Wells “is not getting too far from the pack by going to 600, but it’s nice to hear one of the big players deviating from the herd a little bit.”