Credit Scores vs. Neighborhood Watch
The Federal Housing Administration is requesting lenders to relax their credit score minimums. Currently the average credit score on an FHA-insured mortgage is 700. If lenders allow a lower credit score to qualify for a FHA loan, more borrowers would be able to own a home.
However, lenders are requesting that FHA change their lender/monitoring system known as Neighborhood Watch. Developed in the 1990s to protect low to moderate income communities from predatory FHA lenders, the Neighborhood Watch compares a lender’s performance to average default rates for all FHA loans. If lenders have a high default and claim rate, then the lender will receive an audit from the FHA which can lead to indemnification demands for actual and future loan losses.
FHA is considering their options for putting changes towards the Neighborhood Watch to help lenders supply FHA loans to more borrowers.