one more thing

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The Federal Housing Administration (FHA) is channeling their inner Steve Jobs with their continued amending/changing of loan guidelines.  In case you don’t know, here is how Steve operates… even though it appears he is wrapping up the annual “state of Apple” speech, he often comes back up on stage to say “one more thing” and proceeds to introduce a new product offered by Apple.

So, while FHA continues to make adjustments to guidelines, this may be a growing trend — for now, here’s “one more thing” — the FHA releases plans for tighter loan guidelines – definitely not as much fun as new iPhone!  Here is a look at some of the recent changes (to take affect in the Spring):

  • a 580+ credit score required in order to qualify for the minimum down payment of a 3.5%
  • credit scores lower than 580 will require a 10% down payment
  • the up front mortgage insurance premium (UFMIP) will increase from 1.75% of the loan amount to 2.25% of the loan amount (this fee is generally financed in to the loan amount)
  • seller contributions to closing costs and prepaids will be reduced from 6% of the purchase price to 3% of the purchase price

It important to know how these changes will impact borrowers (usually first time home buyers).  Let’s take a look at each of the changes and their potential impact:

  • CREDIT SCORES – While the FHA itself has not required credit scores, banks have required a minimum credit score of at least 620 for some time now.  The 620 requirement by banks will probably not change, so the FHA 580 credit score requirement will not apply in most cases.
  • UP FRONT MORTGAGE INSURANCE – The up front mortgage insurance premium has been required in some form for as long as FHA loans have existed.  The up front premium is charged to the borrower BUT is rolled into the loan amount – meaning the borrower is not paying the fee out of their own pocket at closing.  Ultimately this will only slightly increase the monthly payment of borrowers (and reduce the maximum purchase price).
  • SELLER CONTRIBUTIONS – If a borrower only has enough for the minimum down payment on an FHA loan, the seller usually pays the closing costs and prepaids on the borrower’s behalf.  Under the old guidelines, a 6% contribution of the purchase price would easily cover all closing costs and prepaids on the loan.  However, 3% of the purchase price may not cover everything and borrowers will need to find other sources (gift from a relative, “low” or “no closing cost loan”, etc.) to cover additional funds due at closing.

In the grand scheme of things, these changes should not have a dramatic affect on borrowers qualifying for FHA loans. It will primarily reduce the amount of house a borrower can afford to buy.

That said, planning ahead becomes more and more important.  Gone are the days of easy financing and no planning needed.  Anyone looking to buy a home using the tax credits (for first time home buyers OR move-up buyers), need to talk to a professional and make sure everything is in order now instead of waiting until the tax credit deadline and realizing (when it may be too late) that there is a potential problem!

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