Credit Scores, Not Income, to Govern FHA Insurance Rates

Chicago Daily Herald (05/16/08); Harney, Ken
The FHA could institute risk-based insurance pricing on all of the loans it insurers by mid-July, basing premiums on FICO scores and down payments rather than on income. A study of all approved mortgages insured by the agency in fiscal 2007 showed a median income of $53,388 for borrowers with credit scores between 500 and 559, while borrowers with higher scores of 680 to 850 actually earned less--a median of $48,756. Thus, FHA officials say the new policy will benefit many low-income borrowers. Currently, all borrowers pay an upfront premium of 1.5 percent and a yearly renewal premium of 0.5 percent. The new policy would impose an upfront premium of 1.25 percent and an annual renewal premium of 0.5 percent for borrowers with credit scores over 680 who make at least a 10-percent down payment on a 30-year mortgage. However, an upfront premium of 2.25 percent and an annual renewal premium of 0.55 percent will be charged to borrowers with credit scores between 500 and 559 who make down payments of less than 5 percent. FHA says that, under the new formula, "a larger number of low-income borrowers [will] benefit from premium reductions than … moderate-, middle- and upper-income borrowers combined."