FHA Loans: Higher fees, bigger down payments coming

Today is the true deadline to submit loan applications before new requirements kick in

To shore up its balance sheet and dwindling capital reserves, the Federal Housing Authority is rolling out sweeping financial changes. Starting next week, FHA borrowers must look better on paper and be better credit risks.

Mortgage insurance premiums are rising, too.

In its official announcement, the FHA said its trying to better position itself to “manage its risk while continuing to support the nation’s housing market”.

Here are the new rules, which hit April 5:

  • Minimum down payment remains at 3.5% for borrowers with credit scores of 580 or more, but it increases to a minimum 10% down payment for borrowers with FICOs below 580.

  • FHA Up-Front Mortgage Insurance Premium (UFMIP) increases to 2.25% of base loan amount from 1.75%, effective with FHA case numbers issued April 5 and beyond. (That means you need to have your applications in TODAY, people! Friday is Good Friday, and most banks will be closed.) While most FHA borrowers roll the UFMIP into their loan amount, the increase would cost borrowers of a $200,000 mortgage loan an additional $1,000.

  • Maximum seller-contribution to pay for buyer’s actual closing costs, prepaid expenses, discount points, and other financing concessions will be capped at 3%, down from 6%. These are the costs that other interested third parties, such as a home seller, the real estate agents, builders, developers, etc., or a combination of parties, can contribute to help a buyer qualify for a home purchase. Regular closing costs, including the up-front MIP, changes throughout the year because the reserve requirements for your property taxes changes from month to month. But right now, that cost is about 3.5 percent. Adding another half-point of costs will require borrowers to have more money in the bank before they can buy a home.

Is this a good thing or a bad thing? Depends on your perspective, I guess. But when times are tough, the responsible thing to do is take responsibility. Tighten the belt. Either way, the rules are here, so deal with it.

With the federal government hemorrhaging money, FHA is attempting to become more self-sufficient. Its cash reserves have fallen below mandated levels and so it must now reduce risks by limiting funds to borrowers with dicey financial pasts. Additionally, mortgage insurance companies have been hammered by paying out on policies for loans that went bad, thus the policy increases.

Think of it this way — if 25% of the drivers in your auto insurance portfolio all suddenly were acting like the Malachy Brothers in a demolition derby, you could expect your rates to go up, too. That’s the situation in the housing market — one-quarter of homes in the United States are upside-down financially, and it will get worse before it gets better.

Will it impact the housing market? Depends on your perspective, I guess. In most of Southern California, we’re dealing with multiple offers on almost every property. FHA borrowers who can’t pay their own closing costs right now have a low probability of having an offer accepted because they are competing against conventional borrowers with higher down payments and cash buyers (yes, in droves). Those paying their own closing costs will have to save a few extra months to make a purchase. Those who need seller contributions will have to save a few extra months to make a purchase. At the end of the day, when people are faced with reality, they tend to do what they need to do.

Scott Chappell and Brian Bean
Real Estate Brokers

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