The FHA's New Risk-Based Pricing Structure

As the old saying goes, real estate is all about location.

These days, however, it might be about something else altogether: credit scores. Even though you’ve probably heard it 1,000 times already, your credit score is critical.

Now you can add one more reason to why your credit score is more important than ever:

Effective July 14, the Federal Housing Authority (FHA) began instituting a new “risk-based” pricing structure on all FHA home loans.

These new premiums are similar to the ones that Freddie Mac and Fannie Mae rolled out in March of this year, but the FHA’s fee schedule is slightly different (see the charts below for comparison).

Although the FHA already had a fee schedule in place—1.5 percent of the size of the loan due at closing and a 0.50 percent recurring mortgage insurance fee—the new pricing structure is less straightforward. The new pricing structure is based on a combination of a borrower’s credit score and the loan-to-value ratio of the new mortgage. The loan-to-value ratio is the amount of the loan in relation to the value of the property.

In other words, the FHA has higher fees for high-risk borrowers and lower fees for low-risk borrowers. The higher your credit score is and the lower the loan-to-value ratio is, the less you’ll have to pay, and vice versa.

There are a couple of exceptions to the new risk-based pricing structure. The FHA announced that 15-year mortgages and loans for multi-unit properties will not fall within the guidelines of this new fee structure.  ∆