The FHA Modernization Bill was touted as way to help more borrowers and increase loan limits in areas that larger loan sizes are needed. The Law does much more than that. This law now allows HUD the ability to risk base price and adjust the MIP (mortgage insurance premium) to accommodate that risk. It encompasses credit scores and down payment assistance (DPA) and ties the eligibility of such to the credit score.
Modernization? Mainstream? Going with the flow? Following the leader? FHA claims that with this action, they will be extending mortgages providing mortgages to 200,000 individuals that wouldn't have been able to get mortgages from FHA in the past. I am not sure that this is a net number of new borrowers. Another agency competing for the same business: FNMA, FHLMC and FHA. HUD is abandoning the borrower that they have always intended on saving, the customer that has little or no credit and only a small amount of money for a down payment. A borrower that doesn't have a credit score, at a minimum, will have to put down 5%. In addition to the increased down payment, the UFMIP (up front mortgage insurance premium) will be increased to 2.25%. These additional funds must be the borrower's or a gift from a family member. Unaffected borrowers are customers with 640 credit scores and 3% of their own money.
FHA Single Family Mortgage Insurance Upfront Mortgage Insurance Premiums Effective as of January 1, 2008 | ||||||||
All premiums are specified in basis points (0.01%) | ||||||||
Minimum Downpaymenta (%) | Decision Credit Score | |||||||
850-680 | 679-640 | 639-600 | 599-560 | 559-500 | 499-300 | None | ||
Funds from Borrower or a Relative | 10 | 75 | 100 | 125 | 150 | 175 | 175 | 200 |
5 | 100 | 125 | 150 | 175 | 200 | -- | 225 | |
3 | 125 | 150 | 175 | 200 | 225 | -- | -- | |
Other Sources of Funds | 3 | 175 | 200 | 225b | -- | -- | -- | -- |
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FHA will use the above chart as a method to price for now but their intention is to program Total Mortgage Scorecard. This will require each deal to be risk priced in the system and the basis points will be adjusted accordingly. This will be very cumbersome for the originator to effectively price loans unless ran through the system ahead of time.
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