Westcoe Realtors, Riverside Ca…We had a question posed to us by one of our internet readers: “I see that HUD is allowing lenders to make home loans to borrowers with lower FICO scores, but most lenders I check with still demand a higher FICO score. What gives? Why aren’t the lenders doing what HUD says they can do?”
Good question…and here’s why local lenders are not climbing on board with HUD’s latest “help.”
The bottom line here is that HUD can say all they want about credit guidelines, but since the local lender still retains the responsibility if the borrower on a loan fails to make the payments, then the local lenders will call their own shots on lending criteria.
To simplify, understand that no matter what HUD says, the local lender will pay the price if a housing loan goes bad…not HUD. This is a result of all the “new lending protections” enacted by the Dodd-Frank act after the housing crash of 2007. Therefore, in today’s lending world, many times, if a housing loan goes bad, and the borrower fails to make the payments, HUD can force the original lender to make-up HUD’s losses, or worse yet, pay a fine.
This was all done to keep the local lenders in check, and to keep them from making so many of the bad loans that led up to the crash of 2007. However, since the government is so good at constantly proving the “law of unintended consequences”, the net result is that in 2016, lenders are now afraid to make a loan to anyone who might look like they may be a lower credit risk…ie; borrowers with lower FICO scores (a FICO score is a numerical rating that reflects a person’s credit history…the lower the score, the worse the credit history…and the worse the credit history, the bigger chance the borrow will get in trouble with the new loan.)
So…HUD looks magnanimous in their pronouncements about helping people get loans by lowering their credit requirements, but until they also accept the responsibility for these loans if they go bad, don’t hold your breath for the local lenders to start lowering their credit standards.
Look at it this way. Dad says his 10 year old can stay up until midnight on school nights, so the child does as Dad says. I mean, it’s OK, right? However, soon the child’s grades plummet because he is sleeping through class, and Dad goes nuts and punishes the child for getting bad grades. The kid says he was only doing what Dad said he could, but Dad is holding the child responsible for Dad’s new sleep policy. Eventually, the child blows Dad off and starts going to bed early enough to get some sleep.
Now you get it. Until Dad takes the responsibility for his new sleep policy, don’t expect the child to follow suit…and don’t get mad at the local lenders when they refuse to be a part of HUDs new plan. Can you really blame them?
Such is the way of life in our current lending world.
As always, thanks for reading our blog, and don’t hesitate to contact us with any questions you may have.