First Time Home Buyer Loan Will Undergo Manual Reviews: Tighter Approvals Coming with the New FHA Standards

Are you planning to have a first time home buyer loan? Prepare to face stricter approval as the Federal Housing Administration (FHA) has implemented new standards.

The FHA helps the borrower with troubled credit score to afford a house by insuring them. However, due to significant changes, FHA will now put more stringent review procedures for riskier loans. As a result, a high percentage of first time home buyer loan applications could be denied. Or worse, some may not even try to apply for home loans because it could be just a waste of time.

Why did FHA impose more rigorous review on first time home loan?

The FHA came up with this decision because, in the past years, the agency has approved many borrowers who turned out to be not creditworthy. FHA’s chief risk officer Keith Becker said that credit quality deteriorates continually while credit risk has a steady increase.

FHA’s automated screening system is the problem’s root cause. Most of the first time home buyer loan applications are approved using this system. Only referred applications which are referred to lenders undergo manual review based on the FHA procedures.

Home Loans Pending to Undergo Manual Reviews

Further, Becker says will implement a more holistic method on approving mortgage that covers various factors. However, its effect may be the same. FHA says that around 40,000 to 50,000 home loan applications which were previously automatically approved will now undergo manual review.

Tightening the Credit

Guy Cecala, Inside Mortgage Finance publisher says that in his estimate, there about 50,000 first time home buyer applicants will be cut out. He added that some lenders may no longer work on loans which will not pass on the automated approval system. This is because manual reviews are costly and take a lot of time.

Furthermore, CoreLogic’s chief deputy economist Ralph McLaughlin said, “Those (borrowers) that may be stretching their financial circumstances to buy a house could be affected” by the new criteria.

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