FHA Mortgages to Implement Risk-Based Mortgage Insurance Premiums
Effective July 14, 2008, FHA will implement risk-based mortgage insurance premiums for all one- to four-unit properties. These new premiums will be based upon the borrower’s credit scores and the Loan to Value (LTV) ratio. The chart below illustrates the new premiums:
HUD’s move to risk-based premiums is a result of the housing and mortgage market troubles that we are experiencing. The risk-based premiums are designed to allow more people to be able to purchase a home and refinance their mortgages and help the FHA program deal with the potential for higher defaults. According to HUD Release Notes (HUD No. 07-123):
The risk-based insurance premium structure will further expand FHA's reach to additional underserved borrowers, particularly minorities and first-time homebuyers who have been disproportionately lured into exotic mortgages, and enhance the FHA's overall risk management. The move to risk-based premiums ensures that FHA remains on solid financial footing as a self-financed agency for the long-term.
This is a great idea to expand the FHA to help those who are able to afford their homes but are in mortgages that are not suitable for their financial situation. It should help more people avoid foreclosure and help to solve the current crisis in the housing and mortgage markets.
Doesn’t this just add more risk for the taxpayer? Won’t this cost the taxpayers more money to bail these people out their mortgage they cannot afford?
No! First, this is not a bailout of borrowers. The borrowers will still have to meet the income, asset, and credit requirements of the FHA program and the value of their property will still have to be sufficient to support the mortgage amount.
There is virtually no sub-prime mortgage market left these days. FHA has always provided mortgage financing to those borrowers who have had small down payments; little to no credit histories; and less than perfect credit purchase and refinance their homes. In fact, FHA loans are sometimes called the original sub-prime loans (See FHA Mortgages to Become More Popular). But, as the sub-prime market has grown, and FHA has become less popular, many people who would have otherwise qualified for an FHA loan have been steered toward less affordable and more risky sub-prime mortgages. This program just gives more people the option of FHA mortgages. And, with the risk-based premiums, people with worse credit and/or higher LTVs will pay more since their loans are riskier – the same way people with worse driving records pay more for auto insurance.
And, most people do not realize that the FHA program costs the taxpayer nothing. It is one of the only (And possible the only) federal program that does not use one single dollar of taxpayer money. It is completely self-sufficient and is funded completely by the UFMIP and MIP payments made by the borrowers with FHA loans. These premiums have been sufficient to cover the entire cost of the program.
Someone told me that the FHA program can help reduce the United States debt – is this true?
Yes! In fact, there have been many years where the FHA program has had a surplus of funds. By law, any “profit” made by the FHA program must go directly to pay down the national debt. So, not only does the FHA program not cost the taxpayer money, it actually helps the taxpayer by helping to reduce the amount of the national debt.
Effective July 14, 2008, FHA will implement risk-based mortgage insurance premiums for all one- to four-unit properties. These new premiums will be based upon the borrower’s credit scores and the Loan to Value (LTV) ratio. The chart below illustrates the new premiums:
All of the premiums are expressed in basis points (bps), or 1/100th of a percent (0.01%). So, for a borrower with a credit score of 620 and an LTV of 97%, the Up-front Mortgage Insurance Premium (UFMIP) will be 1.75% (175 bps) and the annual Mortgage Insurance Premium (MIP) will be 0.55% (55 bps). To see how this differs from the previous system, let’s look at a property with a sales price of $100,000.
HUD’s move to risk-based premiums is a result of the housing and mortgage market troubles that we are experiencing. The risk-based premiums are designed to allow more people to be able to purchase a home and refinance their mortgages and help the FHA program deal with the potential for higher defaults. According to HUD Release Notes (HUD No. 07-123):
The risk-based insurance premium structure will further expand FHA's reach to additional underserved borrowers, particularly minorities and first-time homebuyers who have been disproportionately lured into exotic mortgages, and enhance the FHA's overall risk management. The move to risk-based premiums ensures that FHA remains on solid financial footing as a self-financed agency for the long-term.
This is a great idea to expand the FHA to help those who are able to afford their homes but are in mortgages that are not suitable for their financial situation. It should help more people avoid foreclosure and help to solve the current crisis in the housing and mortgage markets.
Doesn’t this just add more risk for the taxpayer? Won’t this cost the taxpayers more money to bail these people out their mortgage they cannot afford?
No! First, this is not a bailout of borrowers. The borrowers will still have to meet the income, asset, and credit requirements of the FHA program and the value of their property will still have to be sufficient to support the mortgage amount.
There is virtually no sub-prime mortgage market left these days. FHA has always provided mortgage financing to those borrowers who have had small down payments; little to no credit histories; and less than perfect credit purchase and refinance their homes. In fact, FHA loans are sometimes called the original sub-prime loans (See FHA Mortgages to Become More Popular). But, as the sub-prime market has grown, and FHA has become less popular, many people who would have otherwise qualified for an FHA loan have been steered toward less affordable and more risky sub-prime mortgages. This program just gives more people the option of FHA mortgages. And, with the risk-based premiums, people with worse credit and/or higher LTVs will pay more since their loans are riskier – the same way people with worse driving records pay more for auto insurance.
And, most people do not realize that the FHA program costs the taxpayer nothing. It is one of the only (And possible the only) federal program that does not use one single dollar of taxpayer money. It is completely self-sufficient and is funded completely by the UFMIP and MIP payments made by the borrowers with FHA loans. These premiums have been sufficient to cover the entire cost of the program.
Someone told me that the FHA program can help reduce the United States debt – is this true?
Yes! In fact, there have been many years where the FHA program has had a surplus of funds. By law, any “profit” made by the FHA program must go directly to pay down the national debt. So, not only does the FHA program not cost the taxpayer money, it actually helps the taxpayer by helping to reduce the amount of the national debt.
After the failure of IL HB 4050 (See: