If you saw the White House announcement of lower insurance payments on Federal Housing Administration home mortgages last week, you might have wondered: Does this matter to me as a potential homebuyer or refinancer? Who specifically will benefit from the decrease in fees?
The Obama administration estimates that by lowering FHA’s annual mortgage insurance premiums by half a percentage point, as many as 250,000 new buyers will be able to purchase a house. That’s great news and overdue. FHA almost priced itself out of competition with giant investors Fannie Mae and Freddie Mac by raising its premiums several times in recent years. FHA made itself too expensive and its market share has plunged.
So who is best positioned to take advantage of the new, more consumer-friendly mortgage pricing? Here’s a quick overview. Start with your FICO credit score. If you’ve got a score anywhere from 620 to 719 and you have a down payment of 5 percent or less, FHA is likely to become your first choice in terms of monthly payments. It will cost you less in principal, interest rate and mortgage insurance charges compared with what you’d pay for a “conventional” loan eligible for purchase by Fannie Mae or Freddie Mac with private mortgage insurance.
Consider this example using data provided by MGIC, one of the major private insurance underwriters. Say you want to buy a $220,000 first home with a 5 percent down payment. You’ve got a slightly below average FICO score between 680 and 699. Before the premium reduction, your monthly payment using a 30-year FHA loan at current interest rates would have been $1,225. The same conventional loan with private mortgage insurance would have cost you $1,168 a month — $57 less than FHA. After the premium reduction, the monthly payment on the FHA loan will drop to $1,138 — $30 cheaper than the conventional alternative.
But what if you’ve got a higher FICO score? On the same 5 percent loan and rate and term assumptions as above, with a FICO score of 729 to 759, your monthly payment should be lower with a conventional loan. You’d pay $1,106 a month compared with $1,138 — $32 more — for an FHA-insured mortgage with the reduced premiums. At 760 and above, the payment drops to $1,092. So FICOs matter.