Here is the question:

Ken asks,

“Does YSP apply to government mortgages as well creating higher than necessary FHA and VA mortgage rates?”

“I have a friend who swears that FHA rates are FHA rates because of the assistance aspect- no more, no less. I am fairly confident that it does not matter and those government mortgage programs can be inflated with YSP as well.

Am I right here?”

My answer:

Ken, you are right. FHA and VA mortgage rates are created the exact same way as conventional mortgage rates…in the secondary market. Any rate created in the secondary market is passed down from Wall Street where the mortgage backed securities are traded, to the wholesale lenders, and then final to the retail originators - brokers and bankers.

It’s at the bottom or retail level that YSP is added for profit by locking and closing the borrower at a higher rate than necessary. For more information on YSP (Yield Spread Premium) read all the post in our category dedicated to those discussion.

Just like Fannie Mae and Freddie Mac create a working secondary market for conventional mortgage rates, Ginnie Mae creates the market for FHA and VA mortgage rates.

Do not think for a second FHA and VA mortgage rates are “subsidized” by the government - the delusion your friend obviously suffered from - they are not. The market sets the rate, passes it down to the retail level daily, and the bankers and brokers make money selling those rates to the American public.

If anything the increased risk FHA and VA mortgages carry (by lending to borrowers with lower credit scores) actually makes the rates more expensive than conventional rates. Combine that with the overprice mortgage insurance premiums on both FHA and VA loans and you have a total cost that should drive you toward conventional loans if you have the credit scores to qualifying.

Thanks for the question!

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