Hud released mortgagee letter 08-16 on June 11^th, 2008.  In this letter, Hud is changing the FHA requirements for calculating both the Up Front Mortgage Insurance Policy (UFMIP) and the Annual / Monthly Insurance Premium (MIP).

This impact brings both an improvement in these costs for higher FICO score borrowers and/or higher down-payment transactions AND an increased cost to lower FICO score borrowers and/or lower down-payment transactions.  This brings 2 definite impacts to FHA borrowers:

1) Some borrowers with FICO scores 499 and below who are not putting at least 10% down-payment will be unable to get FHA insuring and thus no FHA mortgage.

2) Borrowers with FICO scores at or above at any amount of down-payment will benefit from less expensive Up Front Mortgage Insurance Premium

If you look at the chart, I'll walk you through how to read it. The sample below is for 30 year fixed, FHA loans:

 If the loan to value is ABOVE 95%, and you look at the FICO score range of 680-850 you see it says "125/55". What that means is the UFMIP is 125bps (1.25% of the loan amount) and the Annual MIP is 55bps (.55%).  So on a $150,000 loan the UFMIP would be 1.25% or $1,875 and the Annual MIP would be .55% or $825 (so the monthly is $68.75). Currently, this loan would have a HIGHER UFMIP at 1.50% of $2,250 and a LOWER Annual/Monthly MIP at .50% of $750 annual / $62.50 monthly.

 A couple of key bullet points about this change:

UFMIP will range from 1.25 percent of the loan amount for lower-risk borrowers to 2.25 percent for riskier borrowers.

No borrower who qualifies for a FHA-insured mortgage will pay more than 2.25 percent on the upfront mortgage insurance premium (UFMIP) and 55 basis points for the annual premium.

Borrowers with credit bureau scores must be risk-classified by FHA's TOTAL Mortgage Scorecard.

Those in risk categories without a premium shown are not eligible for FHA-insured mortgage financing.

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 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.

First-time homebuyers (as defined below) who will be obtaining a mortgage with an LTV greater than 95 percent and whose decision credit score is in the 559-500 range are entitled to a reduction of their upfront mortgage insurance premium from 2.25 percent to 2.00 percent provided the homebuyer completes HUD-approved pre-purchase counseling. 

Make sure to read regarding the FHA Streamline refinancing impacts. These are worthy of knowing which Mortgage Insurance rates to use depending on when the original loan was created.

With FHA growing from less than 3% in 2004 to an estimated 30% for 2008, the higher FICO scoring consumers who perhaps could have gone conventional in the past can now benefit from lower Up Front Mortgage Insurance Premiums in the present.

©Ken Stampe 2008

 Ken Stampe is a Mortgage Lender and Author located in Dallas, TX. Read more about him at www.kenstampe.com or at www.homeloan-officer.com