Banks Tighten Mortgage Standards for FHA-Insured Loans

Bank of America (BAC) and Wells Fargo (WFC) were among banks that tightened credit standards for mortgages insured by the Federal Housing Administration in a move that may put a crimp in the U.S. housing recovery, Bloomberg News reported Wednesday.

The banks raised the minimum credit score required to qualify for an FHA-backed loan by 20 points to 640, effectively eliminating 6.3 million people from the potential home buying pool, the wire service said, citing Fair Isaac (FICO). The FHA backs about 20% of U.S. mortgages.

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The new standards instituted by the lenders, which are tighter than those required by the FHA itself, may delay or cut short what appears to be a recovery in the U.S. housing market. Existing home sales in September rose 10% to a seasonally adjusted annual rate of 4.53 million in September from 4.12 million in August, the National Association of Realtors said in late October.

The FHA last month started requiring credit scores of at least 500, while some banks enacted the 620-point minimum credit score in early 2009, according to Bloomberg.

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