Recently Kevin Watters, CEO of Chase Mortgage Banking, compared low FICO, low down payment FHA loans to subprime. While he conflated a couple of FHA’s underwriting criteria, the fact remains that FHA’s core 30 year loan program allows borrowers with a downpayment of 3.5% to have a FICO score as low as 580 along with a total debt-to-income ratio of 50% or more. These loans are subprime based on risk, having a an AEI mortgage default risk score under stress of 40%. These are subprime loans based on history: the indicia of subprime have long been impaired credit as represented by a FICO score of less than 660 or a total debt ratio of greater than 42%. Finally, FHA loans are subprime based on marketing: one of FHA’s major lenders, Carrington Mortgage ran an stating “We have loan programs specifically tailored to credit-challenged borrowers (emphasis added) so there is no need to turn away those borrowers with low FICO scores.” Today, one-third of FHA’s borrowers a FICO score less than 660, with Carrington having the lowest median FICO score—620—of any of FHA’s major lenders. Today, nearly half of FHA’s borrowers have a total debt ratio of greater than 42%. Kevin Watters was right; much of FHA’s lending is subprime.
But there is an alternative to default prone FHA loans that don’t reliably build wealth—the Wealth Building Home Loan. Link to WBHL Executive Summary