August 1st, 2008 by Eric Painter

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On July 14th, the FHA (Federal Housing Administration) changed their guidelines for the cost of mortgage insurance. Prior to July 14th, borrowers using FHA financing paid a monthly mortgage insurance factor of .50% and an up front mortgage insurance premium of 1.50% for any 30 year financing. It did not make a difference if you had NO credit score or an 850 credit score. Money down or no money down, all loans had the same monthly and up front mortgage insurance.

Now FHA has introduced risk-based mortgage insurance premiums. FHA now takes the credit score, down payment, and loan to value (LTV) into consideration. Below is the matrix. As with most things in the mortgage business, the higher the credit score and the lower the loan to value, the cheaper the loan. Now FHA is no different.

So what does that mean? Let me give you some scenarios and show the differences.

First time homebuyer with 599 credit score. They are buying a $170,000 loan with a 3% down payment, which results in a 97% LTV (loan to value). Old FHA, the monthly Payment at 6.25 % for 30 years would be $1099.25. New FHA, the monthly Payment is $1111.20 at the same rate and term. That is a difference of $4302.00 over the life of the loan.

A stronger homeowner who is refinancing their $250,000 loan. Credit score 720 at 95% LTV. Old FHA, the monthly payment at 6.25% for 30 years would be $1666.55. New FHA, the monthly payment would be $1662.70. That’s a savings of $3.85 a month, or $1386 over 30 years.

As you can see, the borrowers with a lower credit score will pay more with the new FHA mortgage insurance. Another factor we are faced with is FHA risked-base pricing for the interest rates. A customer will pay up to a .25% higher rate for having less than a 620 credit score. I recommend that all potential buyers and customers who are looking at buying or refinancing contact their loan officer to review their credit report. A credit review will tell you how to maximize your credit score to insure you get the lowest interest rate and the lowest mortgage insurance.

Increasing your credit scores is not as hard as many believe. They are several free, no hassle ways to increase your credit score by 15-20 points with just a call, but don’t listen to anyone about increasing your credit score unless they are in the mortgage or credit reporting industry. If you are planning to buy a home or refinance a home in the next 3 months, DO NOT pay off any collections or close any account before talking to a professional in the business.

Eric Painter
Loan Officer
www.ericpainter.com
Nova Home Loans
Tucson, AZ