FHA Credit-Score Requirements Increased in 2020, as Economy Struggles

Highlights from this report:

  • Some mortgage lenders have increased credit-score requirements for borrowers.
  • We are seeing higher credit standards for both FHA and conventional loans.
  • According to one report, some lenders are setting the bar around 660.
  • These are temporary measures designed to reduce risk and losses.

Lenders Increase FHA Credit Standards in 2020

Here we go again. Recent reports show that mortgage lenders are once more tightening up their standards for borrowers, due to economic concerns. This happened in the wake of the last recession (2008), and it appears to be happening again.

The short version is that borrowers seeking an FHA loan to buy a house will probably need higher credit scores to qualify, based on current lender requirements.

This trend appears to be happening across the board, with conventional loans as well as those backed by the federal government.

On April 13, for example, HousingWire reported that mega-bank JPMorgan Chase was increasing its credit-score standards for all borrowers. According to that story:

“JPMorgan Chase this week is increasing its minimum lending standards … Chase is also raising its minimum FICO credit score to 700 on purchase mortgages. Put simply, if a borrower doesn’t have a 20% down payment and a FICO score of 700 or above, they will likely not be able get a loan from Chase to buy a home.”

Granted, this is just one bank. But the big banks tend to move in lockstep when it comes to these kinds of policy changes. So we could see similar announcements from other big banks over the coming weeks.

Last month, Bankrate.com reported that both Wells Fargo and US Bank had increased their minimum credit-score requirement for mortgage borrowers to 680. Those changes applied to government-backed loans like FHA and VA, as well as conventional (non-government-backed) mortgage products.

And it’s not just the big banks making these kinds of changes. Smaller regional and local banks are also tightening up their standards for FHA and conventional loans.

Justin Rosenal, senior sales vice president at Union Savings Bank, recently told the Pittsburgh Post-Gazette:

“It’s almost impossible to do an FHA [Federal Housing Administration] loan with a credit score of less than 660 right now.”

Just know that these standards can vary from one lender to the next. One lender might require a credit score of, say, 660 for an FHA loan in 2020. Another might set the bar down around 620. It can vary. So shop around.

Official FHA Requirements Have Not Changed

We need to make an important distinction here. There’s a difference between the official credit-score requirements for FHA loans, and the requirements used by individual banks and mortgage lenders when screening applicants.

Here’s the difference:

  • The official requirements for FHA loan credit scores in 2020 come from the Federal Housing Administration. This agency falls under the U.S. Department of Housing and Urban Development (HUD). They require a minimum credit score of 580 for FHA loans with a down payment as low as 3.5%.
  • Mortgage lenders can set their own requirements for FHA credit scores. Their standards are often influenced by investors who end up buying the loans they generate. And right now, investors are concerned about the financial woes that are roiling the U.S. economy.

To sum up: The FHA credit score changes we’ve seen in recent weeks are coming from banks and mortgage lenders — not from the government.

Measuring Risk With Mortgage Loans

Credit scores are basically a risk indicator. These three-digit numbers reflect how well, or how poorly, a person has borrowed and repaid money in the past. And that’s obviously something lenders want to know, when considering someone for a home loan.

In times of increased economic uncertainty, mortgage lenders tend to increase their credit-score requirements. They usually require larger down payments as well, along with lower debt levels among borrowers.

This is largely why we are seeing higher credit-score requirements for FHA loans in 2020. It’s a direct result of the coronavirus / COVID-19 public health crisis, and the economic recession driven by that crisis.

With the U.S. unemployment rate hitting its highest point since the 1930s, lenders today are concerned about mortgage default, foreclosure, etc. So, in order to reduce those risks, they are raising the bar for eligibility. That applies to all types of mortgage loans, including FHA.

A Temporary Measure Based on Economic Conditions

As mentioned earlier, these higher credit-score requirements will likely be temporary in nature. Some lenders have come right out and stated as much.

Amy Bonitatibus, chief marketing officer for JPMorgan Chase’s home loan division, recently told Reuters: “Due to the economic uncertainty, we are making temporary changes that will allow us to more closely focus on serving our existing customers.”

Mortgage-lending standards are often described with a “pendulum” analogy. When the economy enters a downturn, the pendulum swings toward the conservative side. Banks tighten their credit requirements and underwriting standards for borrowers. Later, when the economy starts growing again, the pendulum swings the other way — toward an easing of criteria.

This is a pattern we have seen many times in the past. So, while FHA credit-score requirements have increased for 2020, it won’t always be that way. We will likely see some easing of lending standards later down the road, when the economy rebounds and the jobs come back.

Note: Every mortgage lenders has its own unique process and criteria for qualifying borrowers. Eligibility criteria are not standardized across the entire mortgage industry. Rather, they vary from one lender to the next. The only way to find out if you qualify for an FHA or conventional mortgage loan is to apply for one.