The Federal Housing Administration made a move last week that will make it a little easier—at least for some borrowers — to get an FHA loan moving forward. Thanks to a new waiver, lenders no longer have to flag an FHA loan rejection in the agency’s system.
Previously, this flag was used to alert future lenders that a borrower had been denied an FHA loan. It stayed tagged to the borrower’s name and Social Security number for six months and required a review from the local FHA Homeownership Center to be removed.
Apparently, though, the system—which has been around since 1990—is less than useful in today’s environment. As HUD’s Mary Jo Houton noted on the waiver form, “Under the current lending environment, considering credit reporting technology and FHA system updates, there is minimal value to the Mortgage Credit Reject screen.”
Essentially, there was a time when safeguards like this were needed—and it may have been pretty helpful back in the post-housing market crash days. But today, with advanced credit reporting and much stricter lending standards, the flag holds little weight. It also adds an extra hurdle to an already laborious process.
As the agency put it, “FHA will no longer require lenders to enter rejection information in FHAC, streamlining the loan underwriting process and removing an unnecessary barrier for borrowers who wish to obtain FHA-insured financing.”
What the Waiver Means for Investors
Don’t let visions of subprime lending and 2008 haunt you. FHA’s waiver doesn’t mean lenders won’t know of past denials, nor will they start lending to borrowers who aren’t properly qualified. They’ll just rely on credit reports—as they already do—to spot past credit inquiries and red flags rather than FHA’s internal system.
For investors using FHA loans to buy (and live in) two- to four-unit properties, this could be a good thing—at least if you were denied an FHA loan at one point or run the risk of denial next time you apply. The downside may be in the extra interest this waiver creates in getting FHA loans and, subsequently, the lower-cost housing market.
Since FHA loans allow for lower credit scores and higher DTIs, they tend to be used by borrowers with fewer financial resources. According to the Consumer Financial Protection Bureau, the median loan amount for FHA loans was just $241,000 in 2021. For conventional loans, it was $290,000, while VA loans sat at a median of $316,000.
All this is to say: Investors eyeing lower-cost properties may find themselves with some newfound competition.
How much more competition? It’s hard to put a number on it. FHA loans currently account for only about 14% of all mortgage loans, and beyond that, just 16% get denied, according to the most recent numbers. This means it will really depend on where you’re buying and how popular FHA loans are with borrowers in your area.
The Bottom Line
There’s no telling just how much this will impact things on the ground, but the waiver officially goes into effect today—so the effects could be felt fairly soon.
FHA has said the waiver will be permanent. The Mortgage Credit Reject screen will no longer show up in the agency’s lender-side system as of today, and its removal will be reflected in the next version of its Single Family Housing Policy Handbook.
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Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.