Risk Based Pricing?

This information is about FHA PMI in June of 2008.  This program has changed 8 times from 2008 to 2012.  Current FHA PMI rates

You are buying a home this summer and you are LOVIN’ Life!  Yippee!

Well, if you have credit scores over 640 – there’s more good news!  Effective July 14 FHA will move to Risk Based MIP and your cost of home ownership will be less!  What is Risk Based MIP?  Well, it’s really just the FHA PMI.  FHA insures mortgage loans, they don’t really “Make” loans – so this is their new Insurance Pricing.

So, what does Risk Based MIP mean and what happens if your score is NOT a 640?

Risk Based MIP means that if you are considered a lower “risk”, because your credit score is 580 (for example) then you will have a higher UFMIP.  What is UFMIP??  It’s the UpFront Mortgage Insurance Premium charged on an FHA loan, and there’s a monthly fee too.

This is going up to 2.0%… meaning that if you borrow $100,000 on an FHA loan – you will also be charged $2000 in MIP.  This mortgage insurance is ADDED to your loan – so your Principal and Interest payments are now based on $102,000 (base loan of $100,000 plus MIP of $2,000).  If you sell the home or refinance in the first 7 to 10 years then a portion of the MIP is refunded back to you.

The most significant part of this change is NOT that the UFMIP is going up… the most significant part is that FHA is going to these steps which many see as the first in moving FHA into the “new” sub prime role.  The Risk Based Matrix actually accept scores down to 525 (and lower)… although we don’t know of “Investors” who are willing to purchase loans at these low credit scores.  FHA does not make loans – they only insure them.

So even though their matrix says you can have a lower score and get a FHA loan – it doesn’t mean that SunTrust (for instance) has to make loans at the lower score.  Our best bet is that it will be at least 12 months before loans for people with credit scores under 580 are made.