FHA MORTGAGE LOANS - New System Would Boost Mortgage Insurance Premiums for Those With Lower FICO Credit Scores!
STARTLING STATISTIC FINDS LOWER-INCOME BUYERS TYPICALLY HAVE HIGHER FICO CREDIT SCORES!
Over the years, loans underwritten by the Federal Housing Authority (FHA), have typically been more forgiving of those with blemished credit. Lending rules for FHA loans have been universally applied, no matter your credit credentials - all borrowers pay a Mortgage Insurance Premium of 1.25% when the loan is initiated, one-half percent in subsequent years - for those with a 10% Down FHA Loan.
Under new rules under consideration by the FHA, those with FICO Credit Scores of greater than 680 will pay the current 1.25 percent initial insurance premium. Those with credit scores falling below 680 will pay a higher premium - both initially, and in subsequent years of the loan. The exact amount of the increase has not yet been finalized.
FHA Executive Brian D. Montgomery outlined the impending change earlier this month to the annual conference of the National Association of Real Estate Editors. Under the old FHA approach, he said, buyers with top credit scores paid the same Mortgage Insurance Premium as those with lower FICO score levels. In his opinion, that amounted to a punitive charge for those with good credit, and an big break for those with blemished credit histories.
The new method, says Montgomery, is based more on risk. Indeed, statistics indicate those with lower credit scores show a greater propensity to default on their home loans, and go into foreclosure, than those with strong scores.
As an interesting side bar to all of this, FHA research last year indicated that those with higher incomes, and who took out FHA loans, had a lower average FICO Score and those with lower levels of income. According to the study, applicants with FICO Credit Scores of 680 to 850 had median incomes of $48,756 last year, while those with scores of 500 to 559 had median incomes of $53,388. Fair Isaac Corporations FICO Credit Scores range from about 300 to 850—the higher the number, the better!
FHA Lenders will draw credit scores from each of the three national credit bureaus - TransUnion, Experian, and Equifax. They will use the middle score of the three numbers (or, the lower if only two numbers are drawn) to calculate their risk, and set MIP Fees. For those with limited credit histories, the FHA will put their emphasis on the prospective borrower's rent and utility bill payment histories.
Loans underwritten FHA have increased by more than double since 2007, as many sub-prime lenders, who would lend mortgage money to those with lower credit scores, or undocumented income, at a higher rate of interest, have gone out of business.
For more info, please read Kenneth R. Harney's article in Sunday's Chicago Tribune.
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