05.31.08
FHA Moves to Risk-Based Premium
A recent study by the FHA has unearthed a big surprise – in 2007, lower-income borrowers had higher credit scores than higher-income borrowers. The analysis showed that borrowers with median incomes of $48,756 year had credit scores that were a better credit risk than Borrowers with average incomes of $53,388. Even in studying loans with the minimum 3 percent down, lower income clients had were statistically more likely to repay. The study is now causing a major shift in FHA lending.
The FHA always has required at least a 3 percent down payment, full documentation of income and assets, and has never allowed prepayment penalties. Historically it used a fixed approach to pricing home loans, but now plans to shift to a risk-based premium tied to FICO credit scores and down payments, similar to the private sector approach of matching down payments and credit scores with the loan rate.
Under the old FHA system, buyers with first-rate credit scores paid the same as borrowers with bad credit scores, paying 1.5 percent premiums up front, and 0.5 percent annually. That created a disadvantage for borrowers who presented low risks and a subsidy for borrowers who were more likely to default. Under the new FHA Premium system, low-income borrowers with higher credit scores will benefit by lower rates.
Under the new system, starting July, on a 30-year loan with down payment of 10% or more, borrowers with FICO scores above 680 will qualify for the lowest premiums – 1 ¼% of the loan amount up front with annual renewal premium payments of ½%. Borrowers with down payments under 5% and poor credit scores (500 to 559) will be charged premiums of 2 ¼% up front and 0.55% annually. Every borrower will continue to receive the same market-based interest rate.