To many, 2009 was the year of the FHA-backed loan. Typically, they make up 3% of all mortgages generated, but some reports pegged the 2009 number at 15% (if you’re curious as to why, read this interesting article on the subject). And like most things that have gone boom recently… well, let’s just say that there was a fear among many that the FHA needed to start instituting stricter guidelines. They had their reasons.
The FHA announced major changes yesterday to how they plan on doing business in the future. If you’re thinking about buying a home with an FHA-backed loan, you’ve only got a few more months before the game changes significantly. FHA loans are going to get more difficult to secure, and more expensive. The major points, below, from Carol Donnelly at iLendGreen.com:
1. The Upfront Mortgage Insurance Premium will be increased from 1.75% of the purchase price to 2.25%. This amount has been allowed to be financed into the borrower’s loan amount and will continue to do so. This change will reduce the buyer’s equity in the property. With a traditional 3.5% down payment, financing in the 1.75% premium ultimately gave them 1.75% equity in the property at the time of the purchase. By financing in the new 2.25% premium, the buyer’s equity will now be 1.25% at the time of the purchase. On a $250,000 purchase price, this reduces the buyer’s equity by approximately $1,250 – effectively wiping out 15% of the buyer’s down payment investment.
2. The seller will no longer be allowed to contribute 6% of the purchase price to the seller’s costs at closing. This amount will now be limited to the current industry standard of 3%. Currently, on a purchase price of $250,000, the seller is allowed to pay up to $15,000 toward the buyer’s costs. This could be used for closing costs, prepaid expenses, escrow deposits, interest rate buy-downs, etc. Typical total costs for closing costs, prepaid expenses and escrow deposits is around $9,500 on a $250,000 purchase price. Under the new caps, the seller will only be able to contribute $7,500 leaving the buyer having to pay the additional $2000 out of pocket. So, where the buyer used to be able to get to closing with only the 3.5% down payment out of pocket ($8,750 in this scenario), they now would need $10,750.
3. The Annual Mortgage Insurance Premium, paid monthly by the borrower, will be increased from it’s existing levels of .50-.55%, pending legislative approval. It may be that some of the upfront mortgage insurance premium (#1 above) will be shifted to the annual premium.
4. The minimum credit score for FHA insured mortgages will now be 580 in order to qualify for the minimum 3.5% down payment option. Borrowers with credit scores below 580 will be required to make a 10% down payment.
5. Increased enforcement on FHA approved Lenders.