Three years ago, FHA mortgages made up a small part of mortgage origination. The 3 percent down payment requirement was no great selling point when home buyers could get conventional mortgages with zero to five percent down, and no mortgage insurance required. Back then, the average credit score of an FHA buyers was 621. Only folks who needed extra underwriting flexibility bothered with FHA home loans.
FHA loans a competitive option
Today, Fannie Mae and Freddie Mac have implemented a schedule of price increases based on credit scores, loan-to-value ratios and property types and use.
Risk-based pricing tiers shift with every 20 point change in credit score. For example, if your score is 680, you may need to pay a surcharge of 1.5 points at the closing or accept a higher interest rate. If your score is 640, the adjustment increases to 3 points at closing. Here is an example of how risk-based pricing changes mortgage rates, according to MyFICO.com, using national mortgage rates from Jan. 21:
Also on Jan. 21, Mortgage News Daily determined that mortgage rates for FHA 30-year loans were 4.72 percent while the best conventional mortgage rates were at 4.85 percent. That's why, over the last three years, the average credit score of FHA borrowers has increased from 621 to over 700.
Conventional mortgage deals tough to get
The best mortgage rates on convential loans are harder than ever to get. Unless your score is over 760, and you have a 20 percent down payment, you will not qualify for the best mortgage rates if you shop for conventional loans. On the other hand, FHA loans don't add extra costs other than mortgage insurance, which is paid by all borrowers for at least five years.
When you compare mortgage quotes, make sure your loan agent knows what your credit score is so that you get an accurate quote. Then compare conventional mortgage quotes to FHA quotes before choosing your next home loan.