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Looming Deadlines

As you probably are well aware, the first-time buyer tax credit and move-up buyer credits are getting very close to expiring; all buyers must be under contract by 4/30/10 and closed by 6/30/10.  What you may not be aware of is the fact that buying a home with an FHA mortgage – a very common loan program – is about to get more expensive.

As promised in December, the Federal Housing Administration – FHA – announced the details of changes intended to strengthen its capital reserves which were reported to be headed into dangerously low territory late last year.  The changes are designed to increase the FHA’s income from customers while reducing its portfolio’s risk and, in turn, avoiding another housing market crash.

David Stevens, the FHA Commissioner, comments:

“Striking the right balance between managing the FHA’s risk, continuing to provide access to underserved communities, and supporting the nation’s economic recovery is critically important,”

“When combined with the risk management measures announced in September of last year, these changes are among the most significant steps to address risk in the agency’s history. Additionally, by continuing to provide affordable, responsible mortgage products, FHA will support the housing market’s recovery. Importantly, FHA will remain the largest source of home purchase financing for underserved communities.”

Here’s what will be changing with all FHA cases assigned on or after 4/5/2010:

Up Front Mortgage Insurance Premium (UFMIP) will be increased so as to build up the capital reserves:

  • The first step of two will be to increase the UFMIP by 0.5% to 2.25% and request legislative authority to increase the maximum monthly premium (MIP) that the FHA can charge.
  • If granted, then the second step will be to move some of the premium increase from the up-front MIP to the monthly MIP.
  • This change will allow for the capital reserves to increase with less impact to the consumer, because the monthly MIP is paid over the life of the loan – or part of the loan’s life – instead of at the time of closing.
  • For a $200,000 home, the first step of the increase above will raise the monthly cost of that mortgage by about $5.50 per month – not a huge jump.

Update the combination of credit scores and down payments for new borrowers:

  • New borrowers will now be required to have a minimum credit score of 580 to qualify for FHA’s 3.5% down payment program. New borrowers with less than a 580 credit score will be required to put down at least 10%.  Keep in mind, however, that many lenders have higher minimum credit scores than that of FHA.
  • This should allow the FHA to better balance its risk and continue to provide access for those borrowers who have historically performed well.
  • For those with lower credit scores, the amount of money needed at closing will be much higher.

Reduce allowable seller concessions from 6% to 3%:

  • The current level of 6% exposes the FHA to excess risk by creating incentives to inflate appraised value and, in turn, sales prices. This change will bring FHA into conformity with industry standards – i.e. in line with Freddie Mac and Fannie Mae – on seller concessions.
  • At 6%, it was feasible for a buyer to bring nothing but their down-payment to closing. In other words, the seller could cover all costs and prepaid items.  Once limited to 3%, it is possible that the buyer may have to bring some money for the closing costs and prepaid items if the transaction is not structured in a way that will keep the total costs below that 3% mark.  Of course, seller concessions are not a guarantee and must be negotiated into the purchase contract.

There are other changes that are going into effect regarding increased lender enforcement, etc, but that has nothing to do with my main topic of why mortgages are going to get more expensive for buyers soon.

If you would like to talk about your lending options, please contact me today for a free consult.


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