FHA To Begin Risk-Based Mortgage Insurance Premiums

Effective July 14, 2008, FHA will implement a risk based premium policy for its mortgage insurance (MI) on 1 to 4 unit single family mortgages. The premiums will vary slightly based on the term of the loan (i.e. 30Yr versus 15Yr), so for the purposes of this post, we have focused on the single family premiums for a loan term over 15 years.

As with everything surrounding today's mortgage market, these new guidelines are another step towards tighter qualification standards and higher borrower costs. In fact, we find the new guidelines rather amusing as most wholesale lenders have enacted their own criteria and will no longer fund FHA loans for borrowers with lower FICO Scores - many now have credit score limits in the 560-580 range.

FHA’s New Risk-Based MI Premiums

Important considerations of the new policy include:

• Up Front Mortgage Insurance Premiums (UFMIP) will range from 1.25 percent of the loan amount for lower  risk borrowers to 2.25 percent for riskier borrowers. Annual Mortgage Insurance Premiums will be either 0.50 or 0.55 basis points.
• No borrower who qualifies for a FHA insured mortgage will pay more than 2.25 percent in Upfront Mortgage Insurance Premiums and 0.55 basis points in Annual Mortgage Insurance Premiums and a first time home buyer with HUD approved counseling will only have to pay 2.00 percent for the UFMIP.
• Borrowers without credit bureau scores may still be eligible but will need to be manually underwritten following the Departments criteria as described in Mortgagee Letter 2008-11. That is, assuming you can find a lender who will still do manual underwriting at reasonable rates and fees.

The new premium matrix is shown below. The premium grid is based solely on the prospective borrower's credit bureau score and the LTV (loan-to-value) ratio.

FHA Single Family Mortgage Insurance
Upfront and Annual Mortgage Insurance Premiums
Loan Terms > 15 Years
All premiums are specified in basis points (0.01%)

FICO Score      850-600      599-560      559-300      No Score
LTV
≤ 90%              125/50        150/50        175/50         150/50

FICO Score      850-640      639-600      599-560      559-500      No Score
LTV
90.01-               125/50        150/50       175/50         200/50         175/50
95.00%

FICO Score      850-680      679-640      639-600      599-560      559-500      No Score
LTV
> 95%               125/55       150/55        175/55        200/55       225/55         200/55

Decision Credit Score Definition:

If a credit score is available, it must be used to determine the decision credit score for the application and the premium to be charged. A "decision credit score" is determined for each applicant according to the following rule: when three scores are available (one from each credit repository), the median (middle) value is used; when only two are available, the lesser of the two is chosen; when only one is available that score is used.

For Multiple Borrowers - if more than one individual is applying for the same mortgage, the lender must determine the decision credit score for each individual borrower and then select the lower (or lowest if more than two borrowers). That "decision credit score" is then used to determine the appropriate insurance premium in conjunction with the LTV ratio.

For Multiple Borrowers/One Without a Credit Score - the borrower representing the greatest risk to the Department will determine the premium charged. For example, if the decision credit score for one borrower is between 559-500 and the other borrower is in the non-traditional (No Score) credit category, the decision credit score between 559-500 is used to determine the premium. However, if the decision credit score for one borrower is between 639-600, and the other borrower is in the non-traditional credit category, the non-traditional credit category is used to determine the premium.

Every time we see the lending guidelines being tied to FICO Scores, we think back to the early 90's when they came into existance and the powers that be swore up and down that they would never be used to qualify borrowers for mortgage loans. And yes, pigs can fly too! And so it goes in the mortgage lending industry, one step forward and two steps back.

Grid and Definition from HUD Mortgagee Letter 2008-16.

Metro Mortgage Company is a federally regulated Mortgage Banker specializing in residential Florida home loans including Conventional, Jumbo and FHA/VA mortgages. Call us today at 888-617-3674.

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