The Bergen County Homes Blog

FHA mortgage loans are extremely important to the real estate industry.  The FHA insures, on average, 30% of all mortgages in the US so any change in FHA policy is big news and something like 70% of all first time home buyers use FHA loans.  Why does that matter?  Because the first time buyer is the home sale that drives the real estate engine.

On October 4th the FHA announced new credit requirements for mortgages which raised the bar for home buyers.  To get a 3.5% down payment loan, a buyer now needs at least a 580 credit score.  For home buyers with FICO scores of 500-579, down payments must be at least 10% and if your credit score is under 500 you’re out of luck – you won’t get a FHA loan.

At the same time, the up front mortgage insurance premium was reduced from 2.25% to 1% and the limit on annual premium increases was raised from .55% to 1.55%

Some people criticized the FHA for making it tougher to get a loan in Steve Bergsman’s excellent article on these changes, he quotes an expert as saying that while only 2% of all FHA borrowers have FICO scores under 580, 27% of them default.  Ouch!

What should be criticized, in my view,  are the wide FHA mortgage ratios allowed.  How about allowing up to 55% of your gross income to qualify for a FHA mortgage?  I think that’s a disaster in the making.  Do you think spending close to 75% of your take home pay on your mortgage makes sense?

Emi Kalici, the Weichert Gold Services Manager in my Tenafly office, said that Weichert Financial Services as a licensed FHA underwriter can be more relaxed with FICO scores for qualified Weichert buyers.  This sounds a whole lot beter for financially able people than widening their ratios recklessly.

Buying a home for most of us means getting a mortgage and, of course, the interest rate on that mortgage is determined in large part by your credit score.  Actually, whether or not you qualify for a mortgage is often determined by your credit score alone.  While it’s true that your income as well as your debt and assets are also important, your credit score is critical to the interest rate charged on your mortgage.

Credit scores are vital to your financial well being in so many ways that have nothing to do with purchasing a home.  For example, your credit score can impact what you are charged for auto insurance or whether or not a utility company requires a security deposit in order to get the lights turned on in your new home.

Here’s a good tip to improve your credit score – don’t pay off your credit cards; instead, get them all down to half or less of what you’re allowed to charge.  Ellen Jacobson is a Senior Mortgagage Banker with JP Morgan Chase and someone I’ve worked with for years.  She told me that most of the folks she sees think that they should pay off one credit card at a time in an effort to have fewer credit cards.  “Nothing could be further from the truth” she told me.  In fact, she said that closing a credit card can hurt your credit score. 

Of course no one is advocating that you maintain credit card debt but if you have several credit cards, try to make sure you keep them all no higher than 50% of what you are allowed and you should see an improvement in your credit score.  It’s also a smart idea to consult with your mortgage banker before you do anything.  Being careful is always a good idea.