Loan Modification

Government does NOT regulate FHA mortgage rates

By Gina Pogol

A report by Community Research for Action concluded that in areas with high minority populations, home buyers were more likely to end up with “high cost” FHA mortgages. Those buying in lower-income neighborhoods also paid more.

Lenders countered that folks with lower credit scores were charged higher rates, and this had nothing to do with their race or neighborhood. However, data collected by the government did support this — even those with good credit were likely to get a “high cost” mortgage if they bought homes in minority-dominated neighborhoods. “High cost” mortgages are defined by by the Federal Reserve as having APRs at least 3% higher than the current rate on a Treasury security of the same length.  So, with 30-year Treasuries hovering around 4.1%, that means high-cost FHA loans today are those with APRs of 7.1% or higher.

FHA mortgages do NOT have surcharges for lower credit scores

While Fannie Mae and Freddie Mac require risk-based pricing adjustments, FHA requires no such surcharges. FHA loans are ALL covered by FHA mortgage insurance, so a riskier loan adds no expense or risk to the lender originating the loan. So there is no reason that an FHA borrower with a lower credit score would need to pay a higher interest rate. Even if the lender could prove that the borrowers in poorer neighborhoods also had lower credit scores, in the case of FHA financing there is still no compelling reason to price mortgages to these borrowers differently.

So if it?s not due to credit issues, why do some borrowers pay more?

I hate shopping

People with credit problems hate shopping for loans. It’s humiliating. So when someone approves them for financing, they are so happy that they don’t push for a better deal.

It’s a government loan. Doesn’t the government set rates?

Less experienced borrowers often think the government regulates the pricing of government loans. That’s not true; FHA loans are finded by private lendes who set their own rates.

It’s up to you.

It?s your responsibility to compare mortgage rates between lenders. And it?s not even that hard. Try the form on this site for starters. See what?s available, make comparisons, and look out for number one.

New rules make it easier

Yes, for non-FHA loans there may be risk-based pricing adjustments if you have bad credit or a smaller down payment or need a cash-out refi. But thanks to new mortgage reforms, loan officers cannot earn higher commissions for selling a loan to a naive person than for selling a loan to a cutthroat bargainer.  So you need to find the lender offering the best deal, but you won’t need to (because it’s illegal to make special deals for some borrowers and not others) negotiate line by line.

Full post as published by FHA Mortgage Guide on December 02, 2010 (boomark / email).