Upcoming Changes to FHA Home Loan Guidelines = Higher Costs to Home Buyers
Upcoming changes to FHA home loan guidelines will increase the cost of buying a home for buyers – especially first-time home buyers. It may sound crazy considering the state of the national housing market, but it’s true.
Here’s the official HUD press release (click here if you don’t see the embedded HUD press release regarding FHA home loan guidelines)…
In a nutshell, here are the FHA home loan guideline changes and what they mean to you…
- The upfront Mortgage Insurance Premium (MIP) is going up from 1.75 points to 2.25 points (1 point = 1 percent of the loan amount). On a $200,000 FHA home loan, that’s an added cost of $1,000
- FHA home loans to borrowers with a FICO score (aka credit score) of 579 or less will go up from 3.5 percent to 10 percent. On a $200,000 FHA home loan, that’s an added cost of $13,000
- Many home buyers going with an FHA home loan ask for closing cost assistance from the seller in order to minimize the amount of cash they need to come up with out of their pocket. Currently, FHA guidelines allow seller closing cost assistance of up to 6 percent of the purchase price. The new FHA home loan guidelines will decrease the amount from 6 percent to 3 percent. I typically see closing costs (including pre-paid items) on FHA loans of between 4 to 5 percent. Under the new guidelines, the home buyer would have to come up with the last 1 to 2 percent out of their own pocket rather than asking for all of it to be paid for by the seller.
To put the changes into perspective, let’s see what the difference in cost will be to John and Jane Smith, first-time home buyers in Northern Virginia using an FHA home loan under today’s guidelines versus the new guidelines…
Today’s FHA home loan guidelines
John and Jane Smith are buying a town home in Northern Virginia for $300,000. They will need to come up with 3.5 percent of the sales price ($10,500) for the down payment. They’re happy that they don’t have to come out of pocket for their closing costs because the sellers agreed to credit them back 4.5 percent of the sales price ($13,500) to cover them. John and Jane need a total of $10,500 cash out of pocket to buy the town home.
Upcoming FHA home loan guidelines
John and Jane Smith will need to come up with $10,500 for the down payment if their credit score is 580 or above. If their credit score is less than 580, they will need to come up with $30,000 for the down payment. The seller will only be able to pay up to 3 percent of their closing costs so they will need to come up with the remaining 1.5 percent ($4,500) out of their own pocket. In addition, they will pay an extra .5 percent ($1,500) in upfront Mortgage Insurance Premium (MIP). The total increase in cost to buy the same town home will be either $16,500 or $36,000 depending on their credit score with the majority of it coming out of their pocket in cash.
Under the new FHA home loan guidelines, Jane and John will need at least 62 percent, if not 343 percent more cash out of pocket to buy the same town home.
When do the new guidelines go into effect? No official date has been set. But they are coming and the word on the street is sometime late spring/summer 2010.
If you’re sitting on the fence when it comes to buying a home right now, you may want to jump off and take advantage of the current FHA home loan guidelines (and federal tax credit) before they change. If you don’t, you could be in John and Jane’s shoes and need an additional 62 percent (if not 343 percent) to buy the same home in the future.
If you have specific questions about the FHA home loan guidelines, the housing market or real estate in general, email or call me – 703.582.6900 – danilo.bogdanovic (at) gmail (dot) com.