Citing rising risks among the mortgages it is backing, the Federal Housing Administration announced earlier this year that it was changing some of its lending rules. The idea behind the change is to look more closely at the FHA loans that are being originated to try to lessen the risk. The changes may be more than warranted because new data released by the FHA shows that the agency appears to be loosening its lending standards and backing loans for increasingly riskier borrowers.
According to the FHA’s quarterly report for its fiscal second quarter, the average credit score for an FHA borrower fell to 665. That’s the lowest level since 2008, and is “well below” the FHA lending peak credit score of 703, which happened in 2011.
The report shows that the credit profile of the FHA borrower has shifted over the last several years. The share of 680–850 credit scores continues to decline among FHA borrowers, while lending to borrowers with credit scores below 640 continues to rise.
The FHA report shows that in 2011, nearly 60% of borrowers had credit scores above 680. Now, only 34% of FHA borrowers have credit scores above 680. Meanwhile, the share of FHA lending to borrowers with credit scores below 640 has increased to nearly 30%.
“This increase shows a much riskier population of mortgages being endorsed by FHA,” the report states. “Performance of these mortgages will be closely monitored to determine when policy changes should be implemented.”
FHA loans have also seen a sharp increase among loans with high debt-to-income ratios, meaning borrowers are taking on more debt compared to their income level. In 2018, nearly 25% of all FHA purchase mortgages had a DTI ratio above 50%. That number has been rising for several years and is a trend that FHA noted as “concerning.” Despite this, the percentage of borrowers with DTIs above 50% continued increasing in the second quarter, climbing to 28% of all FHA purchase loans. That’s the highest percentage of high-DTI loans in a single quarter since “at least the year 2000.”