The Mortgage Professor: Why will some lenders accept borrowers rejected by others?
A good illustration is how lenders set minimum credit scores on FHA loans. The FHA does not impose one, so the decision is left strictly to the lender. Most lenders set a minimum score of 640, but a few go to 580. They do this because they can make more money on the 580 borrower who has no place else to go, knowing that they are endangering their performance record with FHA, which could get them kicked out of the program. In an earlier column, I referred to this as the “FHA subprime market.”
In its essentials, therefore, the problem is the same as it was in the 1920s, and the best advice to consumers is also the same. If you are a marginal applicant acceptable only to a small number of high-priced lenders, you might want to consider whether it wouldn’t be better to wait until you can improve your credentials. This is especially pertinent to applicants who are cash-short and need an FHA loan but have credit scores below 640.
If you are in the conventional market with strong credentials, you may do better dealing with a lender who has overlays that are more restrictive than Fannie or Freddie requirements. There is no simple way to identify these lenders, but if you shop effectively on a multi-lender website, it won’t matter, because these lenders will emerge with the best prices.
ABOUT THE WRITER
Jack Guttentag is professor emeritus of finance at the Wharton School of the University of Pennsylvania. Comments and questions can be left at http://www.mtgprofessor.com.
©2013 Jack Guttentag
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