How are FHA risk based premiums implemented?

Risk-based premiums will affect those FHA loans assigned a case file number on or after July 14, 2008.  This HUD notice details the new rules used to determine the MIP and annual premium percentages.  With the new system, FHA up-front and annual premiums will be based on the loan term, the LTV and the borrowers' credit scores instead of the flat rate premiums used prior to July 14. 
The next to the last page of the HUD notice referenced above contains a good summary of the new risk-based rules and definitions.

Decision Credit Score

The 'decision credit score' is the new score used for the premium calculations.  Here is how that score is determined (excerpted from the HUD notice): 

‘‘decision credit score’’ is determined for each applicant according to the following guidelines: when three scores are available (one from each national consumer reporting agency: Equifax, TransUnion, and Experian), the middle value is used; when only two are available, the lesser of the two is chosen; when only one is available, then that score is used. If more than one individual is applying for the same mortgage, the lender should determine the decision credit score for each individual borrower and then use the lowest score to determine the final decision credit score for the application. That application ‘‘decision’’ credit score is then used as part of underwriting to determine if the mortgagor is considered an acceptable risk.

With risk based premium calculations, credit scores for your borrowers will need to be entered into the file.  Scores are located on the borrower edit screen, accessible from the Borrower section on the Home screen or from the borrower name link in the Overview on the right. 

Returned credit from most credit vendors will populate those scores automatically. If necessary, you can edit the borrower scores from the Borrower edit screen or from the ‘Loan with MIP/FF’ popup screen (GFE Part 1 - Loan Programs > 'Loan with MIP/FF' assist button).

LTV, Loan Term and Scores

The loan term, sales price (or value), base loan amount, appraised value and the borrower scores are required fields for the MIP/annual premium calculation.   With those values entered, the updated ‘Loan with MIP/FF’ screen (Loan Programs > assist button to the right of 'Loan with MIP/FF') displays the calculated information required to determine the MIP with the new risk-based rules.

The ‘FHA MIP table’ has been updated to display the LTV/decision credit score tables, the list of rules used to determine the annual premiums, and other pertinent notes.  To view this screen, click ‘FHA MIP table’ on the bottom left of the 'Loan with MIP/FF' popup screen.

Flat Rate or Risk Based Calculation

For files whose case numbers are assigned before July 14, 2008, the old rules for calculating the MIP and annual premium apply.

Byte uses the ‘Case number assigned before July 14, 2008’ checkbox on the ‘Loan with MIP/FF’ popup screen (click the assist button to the right of 'Loan with MIP/FF' on the Loan Programs screen) to determine the category of each file.

For files created before July 14, 2008, ‘Case number assigned before July 14, 2008’ will be checked by default.  For files created on or after July 14, 2008, it will be automatically un-checked.

If the case file number is assigned before July 14, 2008:

  • On the Loan Programs screen, click the assist button to the right of 'Loan with MIP/FF'.  Verify that 'Case number assigned before July 14, 2008' is checked.  The MIP and annual premium percentages will be in accordance with the old rules.  You can ignore the decision credit score.

If the case file number is assigned on or after July 14, 2008:

  • You must enter the loan term, sales price (or ‘estimated value’ for a refi), and base loan amount.
  • Click the assist button to the right of 'Loan with MIP/FF' (on the Loan Programs screen).  Verify that 'Case number assigned before July 14, 2008' is NOT checked.
  • You must have credit scores for each of your borrowers.  If your credit vendor does not include returned scores with credit, you may have to manually enter borrower credit scores for proper determination of the decision credit score.  You can edit borrower scores by double-clicking the borrower name in the scores list at the top of the 'Loan with MIP/FF' popup screen.
  • Verify that the LTV and loan term are correct, and note the displayed MIP percentage.  The calculated annual premium will be displayed in the Estimates column for MI Monthly premium on the Prepaids screen. 

Refinanced Streamlines and First Time Home buyers

  • If the loan is a refinance, verify that the refi type is correct.  If the original loan's refi type was streamlined (with or without appraisal) and was assigned a case file number prior to July 14, 2008, then check ‘Case number on original loan assigned before July 14, 2008’ and enter the additional loan data to decrease the MIP to 1.0%.
  • If the loan is a purchase with loan term greater than fifteen years, the LTV is greater than 95%, the borrower is first time, the decision credit score is in the 500 – 559 range and if the borrower has been to HUD approved counseling, then check the ‘First time home buyer’ checkbox to decrease the MIP from 2.25 to 2.00.

Also, the file will be categorized as ‘nontraditional credit’ if any borrower on the file does not return credit (see the HUD notice for more information on nontraditional credit). If you need to categorize the file as nontraditional, remove any borrower’s set of scores.