With the announcement by HUD that the FHA will begin using a risk-based structure for mortgage insurance, many are wondering what will change. Currently, FHA borrowers are assigned the same mortgage insurance amounts regardless of the risk they pose to lenders. For a 30-year fixed-rate mortgage, borrowers must pay a premium of 1.5% of the total loan amount upfront, which can be financed into the loan, and .50% as part of their monthly payment. These rates are considerably higher than those associated with conventional loans.
The new system, which will begin on January 1, 2008, will determine the borrowers premium based on his or her credit profile. This will allow for borrowers with better credit to pay a lower percentage. Borrowers with poor credit will have to pay a slightly higher amount. This system has been in place in the private loan market since the mid-90s. The main reason for this change is to attract borrowers with fair credit who would have chosen sub-prime loans over FHA because of the lower mortgage insurance. This change, along with other proposed changes to the FHA, are all part of the push to make FHA loans relevant in the 21st century.