FHA ADOPTS RISK BASED LENDING

Welcome to the new FHA.

It is now official, starting July 14Th 2008, FHA, the federal program that insures mortgages originated by approved lenders will begin using credit scores and loan-to-value for pricing purposes.

What will change is the cost to the borrowers. Until now, FHA charged a flat 1.5% of the loan amount to insure loans, regardless of credit scores and LTV. Only loans greater than fifteen years were and will still be affected by the policy change. The new rates going into effect will vary from 1.25% for the best customers to as high as 2% for those with less attractive scores.

The monthly mortgage insurance that FHA charges to ALL its insured except condo borrowers, will also increase. Unlike Private Mortgage Insurance that only applies to loans over 80% LTV, FHA insurance applies to the percentage of the loan amount. For instance, a FHA insure loan with 80% LTV will pay monthly mortgage insurance until the balance reaches 78% of amount borrowed.

The advantages of using FHA insurance are many:
a) Low down payment: usually less than 3%.
b) Credit scores as low as 580: conventional loans under 720 are subjected to numerous pricing adjustments.
c) Debt-income as high as 43% or more depending on compensating factors.
d) Competitive rates.
e) Cash-out, up to 95% of the appraised value.

The new risk based pricing will strengthen the program rather than weaken it in the long run. The short-term impact will be negligible. Those with high credit scores will see their mortgage insurance costs go down, and this will increase their enrollment in the program.

For more information about FHA insurance and programs, go to www.hud.gov or e-mail me at info@p2funding.com