Even more changes to FHA loans

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In my previous post, we discussed an FHA change that is soon to be implemented. There are a couple more being proposed or recently approved, which include:

  • Reducing seller contributions to closing costs: FHA guidelines allow for a seller to give up to 6% of the purchase price toward closing costs (lender fees, attorney fees, etc.) and prepaid items (setting up escrow account, home insurance, etc.). The seller cannot give any money toward the down payment. So even if the seller were willing to give the full 6% to the buyer, there has to be enough closing costs and prepaids to cover the contribution OR it goes back to the seller.

With today’s guidelines, even on a smaller purchase price, 6% would be enough to cover the closing costs and possibly some (or perhaps all) of the prepaid items. The proposed change would limit seller contribution to the greater of 3% of the purchase price OR $6,000. This sounds scary, but let’s look at the numbers.

If you take the greater of the two, then the minimum is $6,000. That is enough to cover closing costs and some of the prepaid items on the smaller loan amounts and the same can be said on purchases all the way to $200,000. Once we pass a purchase price of $200,000, then the seller contribution will go above $6,000. Once we get past this point, the numbers get even better.

For example, a purchase price of $250,000 gets you $7,500 toward closing costs/prepaid items. Again, this is enough to cover all closing costs and most of the prepaids. At a purchase price of $300,000, now the buyer gets $9,000. That is enough to cover closing costs and possibly all of the prepaids.

Why is this being made into a big deal? In states that have higher closing cost, this is going to make it more difficult for buyers with fewer assets to qualify for an FHA loan. In states such as Georgia, the impact will be miniscule.

  • Increase the up front mortgage insurance: for the first time in the history of FHA, there is a projected deficit in the mortgage insurance funds for FHA loans. This money is set aside to deal with foreclosures. With the slew of foreclosures over the past few years, the fund has dwindled. Once the fund is empty, FHA will have to ask the government for money in order to continue funding new loans. In addition to increasing the monthly mortgage insurance, FHA approved increasing the upfront mortgage insurance premium from 1% of the loan amount to 1.75% of the loan amount. This begins on all new loans date April 9, 2012 or later.

These are the items primarily being discussed. We know the upfront increase is approved, and as soon as a decision is made on the seller contribution, The Mortgage Blog will certainly update you!

In the meantime, how does this affect a potential buyer? From reading this post, you know the cost of getting an FHA loan is going to increase. If you need an FHA and are thinking of buying a home, go ahead and get the process started today. With the option of getting more money for contribution AND it costing less money from the mortgage insurance, FHA loans will only become less attractive in the coming months. If the property is in the state of Georgia, I can help get the ball rolling toward buying your new home!

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