FHA Mortgage Insurance (MMI)           

Loan-to-Value

For risk-based premium purposes, the loan-to-value ratio, computed to two decimals (e.g., 95.65), is calculated by dividing the mortgage amount prior to adding on any upfront mortgage insurance premium by the sales price or appraised value, whichever is less.  Please note that for purchase transactions, the loan-to-value will be the percentage of the sales price (or appraised value) that is borrowed, e.g., 97.75 percent, as prescribed by law.  While borrowers must have at least a three percent cash investment into the property, a portion of their closing costs may be used to meet that amount. 

For refinance transactions, which often include closing costs in the loan amount, the LTV is determined by dividing the loan amount prior to adding on any upfront mortgage insurance premium by the appraiser’s estimate of value. 

“Decision Credit Score” Defined  

If a credit score is available, it must be used to determine the decision credit score for the application and the premium to be charged.  A “decision credit score” is determined for each applicant according to the following rule: when three scores are available (one from each repository), the median (middle) value is used; when only two are available, the lesser of the two is chosen; when only one is available that score is used.  

Multiple Borrowers.  If more than one individual is applying for the same mortgage, the lender must determine the decision credit score for each individual borrower and then select the lower (or lowest if more than two borrowers). That "decision" credit score is then used to determine the appropriate insurance premium in conjunction with the LTV ratio.   

Multiple Borrowers/One Without Credit Score(s).  The borrower representing the greatest risk to the Department will determine the premium charged.  For example, if the decision credit score for one borrower is between 559-500 and the other borrower is in the non-traditional credit category, the decision credit score between 559-500 is used to determine the premium.  However, if the decision credit score for one borrower is between 639-600, and the other borrower is in the non-traditional credit category, the non-traditional credit category is used to determine the premium. 

Multiple Borrowers/Ineligible Score.  Borrowers who fall into a cell with no premium price shown are not eligible for FHA-insured financing.  Lenders may consider reducing the loan-to-value ratio to 90 percent or removing the borrower from the loan to proceed with the application. 

Borrower Disputes Credit Score.  If the mortgage applicant(s) disputes the accuracy of the credit report and, thus, the credit scores: 

• The borrower may delay the transaction and work to repair his/her credit, or

• The borrower may pay the mortgage insurance premium based on the credit score generated (and LTV)

Non-Traditional Credit

For premium purposes, the borrower representing the greatest risk to the Department will determine the premium to be charged (see Multiple Borrowers/One Without Credit Score(s)).  For underwriting purposes, borrowers with non-traditional credit (or insufficient credit) must qualify based on the underwriting guidance described in Mortgagee Letter 2008-11.  

To clarify the guidance in Mortgagee Letter 2008-11 regarding ‘thin-file’ credit reports, the intention was to give lenders the option to also use non-traditional credit sources should they have a minimum trade line requirement to use a credit bureau score.  While the premium charged is based on the borrower representing the greatest risk to the Department, for underwriting purposes lenders may use non-traditional credit methodology to make their determination on the borrower’s willingness to repay the new FHA-insured mortgage.

 Refinancing Delinquent Loans into FHASecure 

For borrowers refinancing delinquent non-FHA ARMs the Upfront mortgage insurance premiums (UFMIP) is set at 2.25 percent of the base loan amount (loan amount excluding UFMIP) regardless of the loan-to-value (LTV) ratio.   

Automated underwriting systems will provide lenders with a feedback message that will inform them of the premium to be charged without recognizing that the loan being refinanced is delinquent. Therefore, the feedback message providing the premium message will caution lenders that if the loan being refinanced is delinquent, then the premium is 2.25 percent for the UFMIP and .55 percent for annual premium when LTV ratio greater than 95 percent; if the LTV ratio is equal to or less than 95 percent, the annual premium is .50 percent. 

Borrowers who refinance their delinquent non-FHA ARM loan into FHASecure and subsequently wish to refinance to another FHA-insured mortgage must use a refinance product that requires full qualifying, e.g., a rate and term refinance.  Once the FHA-to-FHA full qualifying refinance is insured, these borrowers will be able to take advantage of FHA’s Streamline Refinance program. 

Underwriting Rules When Using FHA’s TOTAL Mortgage Scorecard

If TOTAL renders a refer risk classification or triggers a review rule, the mortgagee’s Direct Endorsement underwriter must determine whether the borrower qualifies for the mortgage using the basic underwriting and eligibility requirements.  However, once determined as eligible for a FHA-insured mortgage, the insurance premium charged is as shown in the matrix above.     

Review Rules for FHA’s TOTAL Mortgage Scorecard include excessive payment-to-income ratios and debt-to-income ratios; and from the credit files, a previous mortgage foreclosure within 3 years, a bankruptcy discharged within 2 years and late mortgage payments.  TOTAL will refer the application for underwriting analysis if any mortgage trade line, including mortgage line-of-credit payments, during the most recent 12 months shows: 

·     3 or more late payments of greater than 30 days; or

·     1 or more late payments of 60 days plus one or more 30-day late payments; or

·     1 payment greater than 90 days late 

Although FHA will be charging a slightly higher mortgage insurance premium for certain categories of riskier transactions (e.g., borrowers with low credit bureau scores and high LTVs), those transactions referred by TOTAL are to be fully and properly underwritten.  The increased premiums compensate FHA somewhat for the risk represented by the combination of LTV and credit bureau score, but are not themselves grounds for underwriter approval of a mortgage. The Refer decision from TOTAL suggests that, absent additional factors that can be documented by the underwriter, the credit risk of the loan may be too great FHA to insure. Such mortgages, which may exhibit other risk-layering characteristics beyond credit bureau score and LTV, are to be approved solely on the underwriter’s judgment of the likelihood of successful and sustained homeownership, not on the insurance premium collected.   

If the underwriter approves a loan for which non-credit review rules are triggered, i.e., excessive payment-to-income ratios and debt-to-income ratios, the borrower will pay the mortgage insurance premium based on the decision credit score and LTV ratio.   

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