Credit history and the FHA-conventional choice

Abstract

Models explaining whether households choose conventional or FHA mortgage financing typically use differential insurance premiums, loan-to-value (LTV) and payment-to-income underwriting standards, and local economic conditions to explain household behavior. Using a large and geographically diverse sample, we expand the standard choice model by including measures of borrower credit history. We find that the ability of a homebuyer to avoid credit problems is an important part of the FHA-conventional choice. In addition, credit scores of FHA borrowers are worse on average than those of conventional borrowers, but as LTV increases credit scores of conventional borrowers deteriorate.