Mortgage Insurance Guaranty Corporation (MGIC), the nation's largest mortgage insurer, announced that it is adopting a new pricing model in order to be more competitive. Today, private mortgage insurers not only face competition from each other, but from increasingly popular government-insured mortgages like FHA programs.
The FHA and VA sponsor several government-backed mortgage insurance programs. In 2008, the combined agencies took the lion's share of business for borrowers with smaller down payments, accounting for approximately 60.4% of the total residential mortgages that require governmental or private mortgage insurance. In 2009, the percentage increased to a whopping 84.6%! In many cases, the best mortgage rates for those with less than 20% equity come with FHA home loans--the Mortgage Insurance Premiums (MIP) can be less costly than the private mortgage insurance (MI) required for conventional mortgages.
The Top Tier Gets the Lowest Mortgage Insurance Rate
Under MGIC's new pricing structure, there are three new tiers of pricing for mortgage insurance for borrowers with credit scores of 620 or higher:
- Rates for borrowers with credit scores of 720 and greater decrease
- Rates for those with credit scores between 680 and 719 remain unchanged
- Rates for borrowers with credit scores between 620 and 679 pay more
This dovetails with the efforts of MGIC and other insurers to upgrade their portfolios and offset recent losses by weeding out less desirable mortgage applicants and working to attract the most healthy borrowers. Efforts have included refusing to insure investment property, declining to insure many loans in areas with falling real estate markets, and now, pricing less-qualified borrowers into more expensive insurance policies.
Risk-based Pricing Rewards Good Behavior
On the other hand, many would argue that basing insurance premiums on the risk undertaken is sensible--after all, it's the standard business model of life, health, and auto insurers--and those industries are enjoying extremely healthy profits while mortgage insurers struggle. The bottom line is that if you want the best insurance and the best mortgage rates available, it takes a credit score of at least 720 to get them.