FHA loans offer superb purchase financing for borrowers with limited down payment funds, higher debt-to-income ratios, or compromised credit ratings. They also provide some of the lowest rates available on 30-year fixed money. In several ‘high cost’ Bay Area counties, the FHA’s minimal 3.5% down payment requirement supports excellent financing on loans up to $729,750. But how does one go about finding the best FHA lender to work with? As with most loan programs, the determining factor is not simply who is suggesting the best rate but, rather, which lender is able to deliver on their promises and close your loan. With FHA loans, good clues regarding a given lender’s strengths can be found in their compare ratio and in how many FHA loans they have underwritten. (Link to follow.)
The FHA (Federal Housing Administration) provides FHA-approved lenders with mortgage insurance to safeguard their loans against default. To qualify for this insurance program, lenders must comply with strict FHA guideline standards and also score favorably on their FHA compare ratio. The compare ratio measures the default rate of a lender’s FHA loans against all FHA defaults in the same geographic region over a two-year period. For example, if a lender’s FHA default rate is 10% and it’s just 5% for the region it operates in, then its compare ratio is 200%, or double the average.
A compare ratio below 100% is considered favorable and those above 150% are considered poor performance. Lenders with ratios exceeding 175% may be added to HUD’s watch list, and those with ratios above 200% may lose their ability to underwrite FHA loans. The reason this matters to a prospective borrower is that any lender on the verge of losing access to sell FHA loans is likely to clamp down on its underwriting requirements. Then again, any lender with an extremely low compare ratio –say below 50% -may already be overly demanding in its underwriting requirements and tough to deal with.
When considering a prospective lender’s compare ratio the other significant factor to weigh is the number of FHA loans they have underwritten. Nationwide, over 13,000 lenders offer FHA financing. Not all of them are good, and many have little experience or are still in the process of getting fully credentialed. No matter how favorable a prospective lender’s compare ratio may be, if they’ve underwritten only a couple hundred FHA loans they might not offer the expertise you seek.
Here is how to check prospective FHA lenders’ compare ratios and the number of FHA loans they have underwritten in the Santa Ana geographic area serving California:
1. Go to following link: https://entp.hud.gov/sfnw/public/
2. Click on Early Warning (top left)
3. Highlight “All Lenders/Areas”
4. Area Selection pull down menu: click “Originator By Institution”
5. Bottom left button: click “HOC”
6. Bottom pull down menu: “Santa Ana”
7. Hit “Submit,” then hit “Submit” again.
Lenders should be listed from highest scores (worst) to lowest. As a general rule-of-thumb, lenders with scores above 125% are likely focused on their ranking and offering increasingly difficult underwriting standards. And those with scores below 40% may already be overly selective with the files they approve.