Smart Borrower Blog

FHA Cracks Down on Riskier Loans

Mar 26th, 2019 @ 4:10 PM by Amber Nelson

After noticing worrisome trends in its loan portfolio, the Federal Housing Administration is tightening requirements on its mortgage loans.

Starting with loans assigned a case number as of March 18, the FHA will start flagging high-risk loan applications and put them through a manual underwriting process. The rest of its applications will continue to be underwritten digitally using market algorithms.

The FHA insured more than 1 million home loans in 2018, providing funding for many first-time home borrowers and those will less-than-perfect credit. However, the average FHA borrower credit score has been trending downward since 2011 and took a dive last year to 670, the lowest level in 10 years. Of all 2018 FHA loan made, 13% had credit scores under 620, a 19% jump from the previous year. Lower credit scores are riskier as they indicate a greater likelihood of delinquent payments or even default.

In addition to falling credit scores, FHA loan borrowers have had higher debt-to-income ratios with more than half all FHA-insured loans in the past fiscal year going to those with ratios above 50%. And a growing number of borrowers have both a subprime credit score and a debt-to-income ratio over 50%, an even riskier mix.

There has also been an expansion of cash-out refinance FHA loans, when borrowers pay off their existing loan with a larger mortgage and pocket the difference for their own purposes. These types of loans often put homeowners at greater risk for default.

The stricter underwriting standards are a reversal of a 2016 decision to loosen loan requirements for those with credit scores below 620 and debt-to-income ratios above 43%. While that allowed more Americans to become homeowners, it also made the FHA portfolio – an American taxpayers – more susceptible to loss.

The FHA says it will closely monitor how the new underwriting will affect potential borrowers and try to still afford the opportunity of homeownership to as many Americans as possible.

About Amber Nelson
Amber Nelson is a seasoned mortgage industry writer and a regular contributor to and

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