Posted On March 12, 2019
The National Association of Mortgage Brokers (NAMB) sent a letter to the Federal Housing Administration (FHA) Commissioner Brian Montgomery asking him to consider changing the FHA’s current Mortgage Insurance Premium (MIP) structure to make the product more competitive against low down payment conventional mortgage options like HomeReady by Fannie Mae and Home Possible by Freddie Mac. In the letter, 2019 NAMB President Richard M. Bettencourt Jr. explained with more low down payment mortgage options on the market, the “credit quality of borrowers using an FHA loan has deteriorated.”
The FHA loan, a mortgage loan insured by the Federal Housing Administration, originated after the Great Depression as a way to help families who had fallen on economic hardship rebuild their finances and afford homes. Today, the FHA loan is a popular choice for first time home buyers and low-to-moderate income buyers. FHA loans are not issued by the government, they are issued by private lenders, like CMG Financial, and insured by the FHA. Because FHA borrowers are a higher credit risk, they are required to pay and upfront Mortgage Insurance Premium (MIP) and continue to pay mortgage insurance throughout the life of the loan. Conventional borrowers that put down less than 20% will typically have to pay private mortgage insurance (PMI), but only until the loan reaches a certain amortization rate. Then, the borrower will no longer have to pay mortgage insurance. The only way for an FHA borrower to lose the mortgage insurance is to refinance into a different loan program. Thus, borrowers who could qualify for either the FHA loan or a low down payment conventional option would be more inclined to choose the option that has cancellable mortgage insurance.
The NAMB proposes the “FHA implement or, at least, pilot test a tier pricing structure for credit scores similar to Conventional Loan market where higher credit scores earns a lower annual renewal for the borrower.” Today, first-time home buyers with credit scores over 700 and average debt-to-income ratios are better suited for conventional products, as the FHA loan will cost them more long-term.
This hasn’t always been the case. From 1934 to June 2013, FHA borrowers could cancel their MIP once the loan-to-value was 78% or less. Because of the current MIP structure, many FHA borrowers that rebuild their credit score often choose to refinance into conventional products to eliminate mortgage insurance. This means less revenue for the Mutual Mortgage Insurance Fund (MMIF) and ultimately greater risk. In the NAMB letter, Bettencourt outlined a tier price similar to conventional products, “instead of .85%, 740+ might be .50%. Tier price MIP over time: Lower credit score/higher debt-to-income borrower start at .85% for 3 years. Reduced to .50% for the next 3 years. Then drop to .35% thereafter, if not completely removed.”
If you have any questions about the FHA loan or other low down payment mortgage options, please let me know.