FHA Change Helps Previously Denied Borrowers

While it’s true that helping borrowers raise their credit score can mean a better deal on their next mortgage for over 70% of all loan applicants and this goes a long way toward helping loan officers stop loan fallout, the borrowers that often get the most benefit are at the lower end of the spectrum.

When a lender can help an applicant who just missed qualifying for an FHA mortgage raise their score enough to qualify, it changes their lives. That’s the kind of thing a new home buyer won’t soon forget and it results in repeat and referral business.

Now, a recent policy change announced by the Federal Housing Administration will help lenders serve borrowers who first applied and were rejected by another lender, without waiting for an FHA review.

Removing part of an outdated homeownership timeline

As of September 11, 2023, FHA will no longer require lenders to flag rejected loans in the FHA Connection system. This waiver lifts a major roadblock for applicants with a recent denial. As Housingwire reported recently:

“FHA has determined that this flag does not improve risk management and is often why other lenders will reject an applicant even when that applicant might otherwise qualify for a loan,” the agency explained in an informational notice distributed on Thursday. “Currently, when a mortgagee rejects a borrower’s application for an FHA-insured mortgage, the denial information must be entered on the Mortgage Credit Reject (MCR) screen in FHAC.”

Previously, when an FHA lender denied a borrower, the rejection was logged in the FHA Connection portal for six months. Any other FHA lender the borrower applied with during that period would have to conduct an additional Homeownership Center review to potentially approve that applicant. This extra scrutiny disincentivized lenders from working with recently denied borrowers.

Starting September 11, 2023, denials will no longer be registered in the system. This removes the requirement for a second lender to go through a lengthy exception process in underwriting a recently denied applicant. The waiver essentially resets the slate and gives borrowers another chance at securing FHA financing.

This gives lenders another chance to help them improve their credit scores with CreditXpert.

A move that makes sense for the underserved

According to FHA, the denial flag failed to enhance risk management as intended. In many cases, applicants denied by one lender could likely still qualify with another. But the flag and extra underwriting work it triggered acted as a barrier and added cost.

By eliminating this friction, FHA opens new doors for applicants. The policy change clears the path for borrowers to partner with lenders invested in understanding their full financial picture. Even if recently denied, applicants can now more easily work to improve their loan eligibility and obtain government-backed financing.

The FHA has long worked to responsibly expand sustainable homeownership opportunities to qualified borrowers, which aligns with our own mission at CreditXpert. Removing overly restrictive barriers helps further that purpose.

The denial flag waiver clears one material hurdle on the path to homeownership for these applicants. Talk to CreditXpert about clearing the other, namely, optimizing their credit score so that they qualify. You help them buy a home (when they otherwise would not have been able to). You close one more loan!