More Level Playing Field May Benefit FHA

Private mortgage insurance premiums are higher for people with lower credit scores.  FHA mortgage insurance premiums are the same for all FHA borrowers regardless of their credit score.  The Urban Institute recently posted a blog that indicates that the break-even credit score with a 95% LTV has risen from a FICO score of 680 to a score of 740.  The blog points out some interesting scenarios that may well benefit FHA and / or FHA borrowers.

While the Obama administration estimates that approximately 2,000,000 new FHA borrowers will be benefited by the lower FHA MIP rates, the Wall Street Journal estimates that an additional 3,000,000 existing FHA borrowers might benefit from the lower MIP by refinancing their existing FHA loans into new FHA loans to which the lower MIP would apply. There is a streamlined FHA refinance program in place through FHA, which would facilitate a less expensive refinance of an existing FHA mortgage loan.  The streamline refinance option is explained in detail HERE.

The Urban Institute blog also reiterates the obvious, to-wit: the reduced FHA MIP will benefit low-income and first time buyers who need a high LTV loan at a reasonable interest rate, and who have a lower credit score and a higher debt-to-income ratio ("DTI" ratios).  FHA does insure loans for borrowers with a credit score as low as 580, and the DTI ratios for FHA are 31% (housing expense)/43% (all monthly payments). Conventional lenders generally require a minimum credit score of 620, and DTI ratios are an average of 28%/36%.

With the lower MIP, FHA is now on a more level playing field with private mortgage insurers.  More buyers may find that FHA products are more affordable than once thought and the high volume of business may well provide a revenue stream for FHA that will keep it on the road to recovery.  It is no longer safe to discount FHA as a possible loan source without doing the math.