Changes to FHA Loans and how it affects the buyer…
HUD announced several major changes for FHA loans.
1. Up-front MIP Mortgage Insurance Premium will increase to 2.25%, this will go into effect April 5 2010
How this affects you: Currently up-front MIP is at 1.75% of the base loan amount.
Example: on a $100,000 base loan amount, the amount that is currently added to that amount is $1750.00. This makes the total loan amount that is financed as $101,750.00. The monthly payment (assuming a 5.50% rate) would be $577.73.
Under the new change the new loan amount would be $102,250.00 ($500.00 more added to the loan balance) and the new monthly payment would increase to $580.56 ($2.83 per month more).
The benefit is significant to HUD as it allows them to re-capitalize their insurance fund (which is low due to loan losses over the past several years) and continue to insure home loans will minimal down payments which are a good thing.
2. Borrowers with credit scores less than 580 will be required to put down at least 10%; effective early summer. Current down payment is 3.5% and will stay for credit scores above 580.
How this affects you: Although HUD/FHA has never required a minimum credit score before, most investors have required minimum credit scores for quite some time. Most have a minimum of 620 with a few down to 600 and even 580.
This change might cause some investors/lenders to look at this market segment more seriously because of the significant down payment of 10% possibly opening more opportunities for more borrowers with lower scores and a down payment.
3. Seller contributions to be lowered from 6% to 3%.
How this affects you: This is VERY significant especially lower priced homes. Currently on a $100,000 the seller is allowed to pay up to $6,000.00 (6.0%) in closing costs and pre-paid items (taxes/insurance).
This change will reduce this amount to only $3000.00 (3.0%) in this example.
If your closing costs and pre-paid items happen to be $4,000.00, then you the borrower would have to pay that difference yourself out of pocket ($1,000.00) due to maximum being now 3.0 percent.
This means that your “funds to close” would be $1,000.00 higher than under the prior guidelines. Not a good thing on a cash strapped buyer.
4. The waiver on anti-flipping requirements is effective February 1, 2010.
How this affects you: This is very good news and means that there will be a better inventory of renovated property properties to chose from for buyers. Let’s face it, there are allot of properties out there for sale but many of them are in very rough condition or in short sale situations where it is difficult for a first time buyer to either have to deal with renovations or wait for banks to approve the short sale.
This new rule removes the “90 Day hold requirement” by sellers so that properties can be resold more quickly after a purchase. This will help “fix and flip” investors by reducing their hold times on properties and provide more inventory to prospective buyers.
One word of caution to buyers; “Beware of properties that were purchased and marked up with little or no renovation being done.” There are specific rules that must be followed in order for these properties to be financed through FHA/HUD.
As always, feel free to call me as a resource for your real estate needs.