If your credit is, well, iffy, you'll want to take note of this. FHA is taking a hard look at lenders with higher default rates, and taking away their approval to underwrite FHA mortgages. Even if every loan they approve and fund conforms 100% to FHA's underwriting guidelines. Why should you care? A couple of reasons.
First, if you have an FHA loan in process, and your lender gets yanked, your loan ends up in limbo. Not something you want to happen, especially if you're trying to get a loan closed before June 30th so you can take your first-time home buyer tax credit. So if time is of the essence, you don't want a lender with a high default ratio.
The second reason is even more compelling for people who have bad credit or have re-established credit after having bad credit. FHA guidelines may allow you to be approved for a mortgage with 3.5% down and only a 580 credit score, but many lenders require 620, 640, or 660 to approve you. In fact, the average FHA borrower today has a credit score of 693, up from 621 just a couple of years ago. Knowing which lenders have higher default ratios may point you to the ones that accept lower credit scores or underwrite with more leeway. So if you need that kind of consideration, you may want to seek out these lenders when buying a home.
What is a default and claim rate (DCR)? FHA looks at two things over a 24 month period when it rates its lenders. First, the default ratio, which is the number of FHA loans that go into default divided by the number of FHA loans funded. So, if a lender funds 500 FHA loans in a 2-year period and 20 go into default, its default ratio is 20/500, or 4%. This rate is compared to that of every FHA lender in a field office's jurisdiction, using what is called a compare ratio (CR). So if the average default / claim rate is 2%, the lender with the 4% rate's clients are defaulting twice as much; its compare ratio is 200%. Ratios of 200% or higher put the lender at risk for losing its approval. Ratios of 150% or lower are considered safe.
You can look up the DCR and CR of any lender in your area. Just go to the Neighborhood Watch Web site (the site was set up by FHA). Click on the "Early Warnings" tab and then on "single lender" to check on a specific company, or choose all the lenders in the jurisdiction of the field office in your area. Then you see the CRs and DCRs for all of them. Click “Submit” to get the data.
