A report by Community Research for Action found that home buyers in areas with high minority populations were more likely to get FHA mortgages designated "high cost." This also held true for those buying in lower-income neighborhoods. And yes this blows big green boogers but it's not the point of this blog post.

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Lenders tried to explain that people with lower credit scores paid higher rates, but the data collected by the government did not bear this out -- even people with good credit were likely to get a "high cost" loan if they bought homes in certain areas. High cost loans are defined by by the Federal Reserve as having APRs of 3 or more percentage points 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 are any with an APR of 7.1% or higher.

Kicked When Down?

Interestingly, while conventional mortgage lenders impose risk-based pricing adjustments, charging borrowers with smaller down payments or lower credit scores more than borrowers with good credit and big down payments, FHA requires no such surcharges. And all loans that conform to FHA guidelines are covered by FHA mortgage insurance, so a riskier loan presents no added 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 these borrowers differently.

So if it's not due to credit issues, what gives? Do these folks walk around with Kick Me signs taped to their backs?

Kick Me

Shopping for a mortgage when you have bad credit is no fun. Bad credit mortgage lenders all have their own rules, and you may have to apply with several, going through an uncomfortable process of airing your dirty financial laundry, and maybe getting turned down a few times. So maybe when someone says he or she can get you a loan, you are so happy that you don't hold the lender's feet to the fire and shop for the best rate you can get. Or maybe you're under the impression that the government regulates the pricing of government loans -- why not, they are called "government loans," duh... And perhaps some loan agents understand that denizens of certain neighborhoods are less likely to negotiate their best deal on a mortgage or just want to get an uncomfy process over as fast as possible. And so they get away with charging some people more than others.

Kick Butt

It's up to you 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. And don't be so freaking grateful to be approved that you don't look out for numero uno.

Government loans are sold by private lenders. You have to shop. FHA just insures the loans, it doesn't lend you the money. That's done by private lenders who charge whatever the market will bear. It's up to you to compare lender pricing and choose the best deal you qualify for. And don;t let anyone tell you that you have to pay a higher FHA rate because you have bad credit.

Kick Back

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, your loan professional cannot earn a higher commission for selling a loan to a clueless person than he or she does selling a loan to a savvy person. So you will be able to get away with being a bit more clueless than you could have in the past. You do need to shop several lenders to see who's offering the bestpricing, but you won't need to negotiate beyond that.