A new risk-based premium program for FHA loans went into effect July 14, 2008. Until two days ago, FHA loans, which are government backed programs, charged all borrowers the same regardless of credit score or loan to value.
The one size fits all plan is gone.
Here are the changes that consumers need to know. These apply to both purchase and refinance loans. They do not apply to the FHA’s Reverse Mortgage program (HECM) or Title 1 loans.
- If the Loan to Value is 95% or less, the annual premium is 50bps or .5% x the loan amount. If the LTV is higher than 95%, the annual premium is 55bps.
- The upfront premium, a financeable non-refundable fee, is now determined by a combination of the credit score and the loan to value.
Since consumers with less money to put down and/or with less than perfect credit are bigger risks to default, they will be required to finance additional fees into their final loan amount. They will also pay slightly higher monthly payments.
The best advice for future homebuyers, save 5% for a down payment and keep your credit clean. Pretty simple huh?
I don’t expect reduced demand for FHA loans as a result of these changes. Interestingly, FHA business is booming as many sub-prime originators are now selling FHA loans as a replacement product.
I applaud FHA for introducing the risk-based premium schedule. By embracing this pricing structure, FHA is creating a marketplace for higher risk loans. However, I believe it took the agency far too long to act. If the bureaucratic agency had implemented these changes back in 2004 or 2005, the damage from the subprime collapse might have been mitigated.
This delay has come at a price.
Many of the high LTV, negative amortization loans in default, would be performing better with a traditional mortgage product. I believe FHA is partially to blame for some of the problems in the credit markets. Their inaction to push for these reforms sooner allowed the sub-prime market to flourish. Hopefully FHA will be more proactive going forward. These latest changes are a good start.
What do you think?