First time buyers using FHA financing should be aware that the US Department of Housing and Urban Development (HUD) recently announced policy changes that will increase the cost of FHA financing. In early spring, the Mortgage Insurance Premium that is required on low down payment FHA loans will increase from 1.75% to 2.25%. This fee is typically financed into the loan, and the higher fee amount will result in an increase in overall loan costs and, when financed, a slight increase in the monthly payment FHA borrowers will see. HUD is also increasing the down payment required if a borrower has less than a 580 credit score. Borrowers with a credit score of 580 or less will have to put down a minimum of 10% instead of the 3.5% allowed to borrowers with a higher score. Frankly, I don’t think this new policy will have that much impact. In my experience, most lenders were requiring FHA borrowers to have a minimum credit score of about 600-620 anyway to qualify for a 3.5% downpayment, and this rule just reinforces that.
In early summer, the amount of seller paid concessions is now being limited from 6% down to 3%. I don’t understand why HUD is making this adjustment now, just as I didn’t understand why they did away with down payment assistance programs just as the housing market was trying to crawl out of its darkest hour. I can understand that this type of change makes the quality of borrowers better. What I don’t understand is the timing and also coupling this action with the push on the other end to give buyers an $8000 tax credit and very low interest rates in order to encourage home ownership. The government is not being consistent in its policies — go figure.
What does this mean for first time buyers? Well, first time buyers will have to save more money to be prepared to enter the housing market. The seller can “only” cover up to 3% of the purchase price in closing costs, and if your closing costs exceed that amount — which they easily can if your purchase price is under $200,000, you will have to pay the remaining costs. Ironically, this will probably impact buyers who are being conservative and spending less money on a home since it is expressed as a percentage cap. For example, if you are buying a home or condo at $150,000, your closing costs could easily be as much as $6000, but the maximum the seller could contribute under the new guidelines is $4500. So, the borrower would have to come up with the remaining $1500 in order to close on that loan. It is already a good idea to save your closing costs as well as your down payment when preparing to buy a home. This new policy simply makes being prepared even more important.
If you are interested in buying a home on the central coast, I strongly recommend using a local lender. If you would like a list of available properties, please send me an email, or give me a call at (805) 878-9879.
Tni LeBlanc, JD, M.A., e-PRO
Broker/Owner, Mint Properties
(805) 878-9879, tni@MintProp.com