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Analysts say home loans will soon be hard to get with bad credit

By Paul Nelson | Posted - Jun. 23, 2009 at 11:11 p.m.

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SALT LAKE CITY -- The point of an FHA loan is to help people with low credit scores get a home, but there's one major problem.

"The default rates for FHA loans have climbed up around 8 to 8.5 percent, which is huge. They should be around 1.5 to 2 percent," explained mortgage analyst Al Bingham.

Bingham says these default rates are too much for lenders and too much money is being lost. "Even though they're HUD insured, if lenders incur a certain percentage or high rates of default, they incur penalties from HUD," he said.

Lending agencies have internal risk analysts that have pointed out some troubling trends.

"What they've been noticing is a lot of defaults with credit scores in the 500s. Lately, now they're seeing defaults with those with credit scores less than 660. That's why you continue to see this ratcheting up of credit score requirements," Bingham said.

He says some lenders have approved people with a credit score between 580 and 620 in the past, but now he's watching lenders change their minimum credit score requirements to between 620 and 660.

"You have to realize those with 660 or lower credit scores, that's about 40 percent of the population. It's a huge segment," Bingham said.

Plus, people with scores between 620 and 660 will have to put more down than before to get a loan. Bingham expects these changes to be industry-wide within the next 60 to 90 days.


Paul Nelson

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