Wells Fargo & Co. has dramatically lowered credit score requirements for Federal Housing Administration mortgages, the first major lender to do so following pressure from the agency and housing advocates.
Last month, Wells began accepting applications in its retail branches for FHA loans from borrowers with FICO scores as low as 500. Previously, it required a score of at least 600 for retail FHA borrowers. The minimum FICO score remains 640 at the company's wholesale and correspondent channels.
Although the move could open the spigot for a number of homebuyers with bad credit, it's not a free-for-all. For borrowers with the lowest credit scores, Wells has added other major restrictions, including a minimum 10% down payment and a maximum 31% monthly mortgage debt-to-income ratio, that are expected to reduce the number of consumers who would qualify. Borrowers with credit scores of 580 to 599 will need a downpayment of at least 5%.
FHA Commissioner David Stevens has been urging lenders in the federal mortgage insurance program to lower their minimum credit scores. Last year he said that banks' "credit overlays" – requirements for FHA loans that are tighter than the agency's own standards – were artificially constraining home sales by as much as 20%. Demanding a credit score of at least 640, for example, excludes about 15% of potential FHA borrowers, Stevens has said.
"Stop eliminating 10% to 20% of the market for people who are able to buy a home," Stevens told bankers at a conference in November.
Tom Goyda, a Wells spokesman, said the bank "is committed to responsibly serving a wide range of borrowers." The new requirements, he said, "are designed to ensure we lend to customers who we believe have an ability to pay."
Overlays are meant to protect the lender against default risk. Even though FHA loans are insured by the government, it can make the lender indemnify the agency against losses if underwriting errors are discovered. Defaulted loans are also costlier for a lender to service.
The change by Wells also comes a few months after a consumer advocacy group filed a redlining complaint with the Department of Housing and Urban Development, FHA's parent agency, against 22 smaller FHA lenders.
