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January 24, 2010
This week the FHA announced changes for FHA home loans. The good news is the changes were not as drastic nor potentially devastating to the housing industry as what they could have been.
In a nutshell, the changes which will become effective sometime this summer are:
1. Maximum seller contribution to buyers closing costs reduced from 6% to 3% of the sales price. Of the three changes to FHA home loans, the reduction in the amount sellers can contribute to a buyers closing costs has the biggest impact. But even the impact of this change is going to be small.
A few years ago, it was common practice for buyers to essentially roll their closing costs and prepaids into their loan but these were the good old days. With the extra scrutiny on appraisals, buyers are no longer able to add the 4% to 5% in closing costs and prepaids on top of the sales price and still have the house appraise.
2. Upfront Mortgage Insurance Premium raised from 1.75% to 2.25%. The 0.5% increase will be a small increase in a home buyer’s monthly payment. For example on a $150,000 loan the $0.5% increase would be $750. The Mortgage Insurance Premium can be added to the loan amount.
So at today’s interest of 5%, an increase of $750 in the loan amount would increase a home buyer’s monthly payment by $4.03. Less than the cost of a combo meal at the majority of fast food restaurants.
3. If a borrower’s FICO score is below 580, the borrower would be required to put 10% down instead of 3.5%. Requiring borrowers to have a higher credit score to qualify for a minimum down payment of 3.5% is going to be of moot impact. The majority of lenders already require borrowers to have a minimum credit score of 600 or 620 to qualify for a FHA home loan. Even if the borrower was willing to put 10% down there are very few lenders who are willing to give him a loan.
If you are going to be a first time home buyer and planning on getting an FHA loan what does all these changes mean to you?
If you are planning on buying before summer, these changes will not impact you. The changes would have been made after you purchased your home in Spring Texas.
If you are planning on buying a home after spring, then you better be ready to bring more money to the closing table. Because the sellers will only be able to contribute a maximum of 3% to your closing costs and prepaids which will leave you footing the tab for the remaining 1% to 1.5%.
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