If you were reading our blog about two months ago, you may remember an article about Upcoming FHA Changes. Well, these changes are going into effect on Monday, October 4th. Here’s what you need to know.
Will these changes affect me? Why are they changing the FHA program?
First of all, it’s important to note that these changes are not retroactive. If you have an existing FHA loan, or your FHA case number was requested before October 4th, your mortgage insurance will be calculated using the current rules, with a larger up-front premium and a smaller monthly premium. If you apply for a mortgage through the FHA program on or after October 4th, 2010, these changes apply to you.
These changes were implemented to increase HUD’s Capitalization ratio, or the amount of funds that it has in reserve to cover the number of mortgages that it takes on. This is a good thing, because if HUD were to stay undercapitalized, FHA loans could be harder to come by.
FHA Insurance Changes – Effective Oct. 4th, 2010
Currently, FHA Mortgages require an up-front mortgage premium of 2.25%, or $4,500 for a $200,000 house. This is a cost that you pay (usually financed into the loan) “up-front” in order to get the FHA mortgage. You then pay an ongoing annual mortgage premium of somewhere between 0.5% and 0.55%, depending on your down payment and loan to value ratio. You pay this premium monthly, so we figure out the annual premium and divide by 12. On a $200,000 mortgage, your monthly mortgage insurance would be between $83 and $92. If you apply for a 15 year FHA mortgage, these premiums will actually be lower.
These changes, effective on Monday, will decrease the up-front mortgage premium to 1% (or $2,000 on a $200k home) while increasing the annual premium to 0.85% to 0.9%. Again, your annual premium rate depends on the size of your down payment and loan to value ratio. On a $200,000 mortgage, this increases your monthly mortgage insurance to between $142 and $150, an increase of about $58 monthly. Again, a 15 year FHA mortgage will have reduced mortgage insurance costs.
The FHA Reform Bill that passed two months ago allows FHA to increase its annual premium to a new cap of 1.55%, so a year from now we may only have fond memories of 0.9% annual premiums.
Seller Concession changes?
A “Seller Concession” takes place when a seller pays (through their proceeds of sale) some or all of the closing costs & prepaid expenses for the buyer of their property. In the current market, it has become common for a seller to pay some or all of the third party fees for a buyer, to help them reduce the total cost of purchasing.
Using a $200,000 purchase on a 30 year fixed FHA loan, the minimum downpayment is 3.5%, or $7000. Closing costs & prepaids could easily amount to another $6000-8000 depending on the taxes, insurance costs, time of year, etc. Being able to cover these additional cost for a buyer can help the seller find more qualified borrowers or lower the total purchasing costs for a buyer of their home. Currently seller concessions are capped at 6% (of the sale price of the home) for FHA Mortgages.
There has been speculation, but no official statement, that this percentage could be lowered. This could make things much tougher for consumers, because in smaller markets where real estate is much cheaper, the 6% concession is needed cover all of the buyer’s costs.
If HUD decides to lower the amount that a seller is allowed to contribute towards a buyer’s closing costs & prepaids, it could slow down some already-troubled markets.
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Geoff Boyd – PrimeLending – Clackamas, OR