Borrowers with less-than-stellar credit should shop around for these more aggressive lenders

Potential homebuyers looking for lower MI costs for FHA loans in 2022 are likely to again be disappointed, even as the capital strength of the FHA’s Mutual Mortgage Insurance Fund (MMIF) rose to a level last seen before 2006. FHA is mandated to have a minimum reserve of 2% against losses; for the 2021 fiscal year, the reserve was 8.03%, more than four times the required amount.

Despite the greatly improved solvency of the MMIF, there are no plans to lower upfront or annual MIP costs or allow for the termination of mortgage insurance. The sectors of the MMIF that back FHA forward mortgages and especially HECMs are performing better than they have in years; however, the COVID-19 breakout last year saw a sizable share of FHA-backed mortgages moved into mortgage payment forbearance programs, and these do present some risk of loss for the FHA insurance pool. With still-difficult conditions in some sections of the housing market likely to continue for at least a while yet, HUD will remain prudent about lowering costs, even if this is to the chagrin of homebuyers and homeowners.

Although the cost of an FHA-backed mortgage probably won’t fall in 2022, access to funding may continue to improve as lenders slowly to reduce or remove so-called “overlays”, where an individual lender will require a higher credit score than the minimums that the FHA requires.

Add lower down payment and credit requirements to the mix, and the fact that these federally-insured loans are assumable and don’t use risk-based pricing to set rates, and FHA mortgages are an attractive option to many borrowers.

Carla Blair-Gamblian, a home loan consultant for Veterans United Home Loans in Columbia, Missouri, says that FHA loans will always have a place in the market whether their costs rise or fall.

Advantages of FHA mortgages in 2022

“Not everyone can qualify for a conventional loan, so comparing [conforming loans] to FHA loans across the board may not yield the best picture of what loan product is best,” she says.

The FHA requirements for credit score and down payments are far lower than for conventional loans. Borrowers can technically qualify for an FHA loan with credit scores of at least 580 and a down payment of just 3.5 percent, according to HUD. Borrowers with a 10% down payment may be eligible with a FICO score as low as 500.

”While an FHA-backed mortgage with FICO 580 is theoretically available to borrowers, many lenders add ‘overlays’ on these minimum requirements,” says Keith Gumbinger, vice president of HSH. “Loans with the lowest credit scores tend to default at a much higher rate, and lenders are afraid that if they issue too many loans that later fail, HUD will no longer allow them to write FHA-backed mortgages.”

Chris Fox, president of FB Financial Group in St. Louis, says that borrowers must have credit scores of at least 620 or 640 to qualify for most conventional loans. Fox also says, though, that this is a bit of a misleading benefit. He says that not many lenders will approve any loan, conforming or FHA, for borrowers with credit scores under 620.

FHA mortgage rates

FHA mortgage rates are typically lower than mortgage rates on conforming loans. FHA Borrowers with credit scores of 660 will often qualify for the same interest rate as would conventional borrowers with a score of read here 740, says Blair-Gamblian.

One important difference between conforming and FHA mortgages is that unlike conventional mortgages, FHA does not use a risk-based pricing arrangement. This means that borrowers who don’t have the best credit aren’t penalized with a higher interest rate, and that can be a strong reason to consider an FHA-backed loan, even if there can be drawbacks on the mortgage insurance side, discussed below.