Quick – name three banks.
Chances are that two or three of those that first come to mind are big household names – some of the huge national or super-regional financial institutions that dominate the banking business. However, if you are in the market for a mortgage and are looking for an FHA lender, those household names may not be your best option.
Because of the recent regulatory environment, when it comes to FHA mortgages "big" may be on the way out. If you are looking for an FHA lender these days, you might be better off thinking small, as in local banks and credit unions, or trying a non-bank lender.
How Regulatory Enforcement has Affected Finding an FHA Lender
As reported recently by the National Mortgage News, large banks have beaten a hasty retreat from FHA mortgage lending. Large banks once dominated this market – as recently as late 2012, large banks accounted for 65.4 percent of FHA loan originations. Now, that market share is down to 23.5 percent.
A poster child for this trend is JP Morgan Chase Bank, a $1.8-trillion institution whose share of FHA mortgage originations plummeted by 98 percent in just two years, from 12.2 percent to just 0.2 percent.
Why are big banks backing away from FHA loans? Many experts point to stiffer regulatory enforcement in the aftermath of the housing crisis, such as the Justice Department's vigorous pursuit of lenders whose allegedly shoddy underwriting procedures left the FHA on the hook for an unusual number of bad loans.
It used to be that part of the attraction of FHA loans was that lenders didn't have to worry as much about the creditworthiness of the borrower, because the FHA insured the loan. However, with legal enforcement holding FHA lenders more responsible for loan quality, some big banks have decided FHA loans aren't worth the risk.
Still, when one door closes, another one opens, and the retreat of big banks from FHA lending has opened the door for non-bank lenders and in some cases smaller, local banks and credit unions to take the market share previously dominated by large banks. In this environment, identifying the right FHA mortgage lender might take a little more effort, but it can be well worth it.
Tips for Finding an FHA Lender
Here are some tips for identifying an FHA lender in this environment:
Consider smaller banks
If big banks are turning up their noses at FHA loans, consider smaller banks and credit unions. In particular if your area has a strong real estate market, chances are the loan business of local institutions is thriving and they will be eager to make loans.
Think outside the bank
Non-bank lenders – firms that specialized in lending without getting into traditional banking areas such as deposit accounts – have led the way in stepping into the void left by large banks. Since these firms specialize in lending, they are less likely to suddenly shut the door on an area of the business as important as FHA mortgages.
Use online resources
While this environment calls for casting a wider net in search of a lender, online resources for identifying lenders and comparing mortgage terms make that easier than ever before.
Move on from rejection
If you get turned down for an FHA mortgage by one lender, don't assume you can't qualify for one. As recent trends demonstrate, different banks have different business models and priorities, so the goal is to find a lender that is currently being constructive about making FHA loans.
Polish your credit
Since the recent regulatory environment has introduced an element of risk for lenders who write bad FHA loans, you can improve your chances by beefing up your credit score so you will look like less of a risk.
In some ways, the days when big banks dominated FHA mortgages made it easy to find an FHA lender. However, having to consider less obvious choices like smaller banks and non-bank lenders opens consumers up to seeing the full range of choices available to them. With FHA loans, as with anything else, more choices typically means better deals for consumers.