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)…

FHA guideline changes 2010 –

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.

(UPDATED) FHA to Allow $8K Tax Credit as Downpayment (RETRACTED)

UPDATED 5-14-09 I’ve have learned that the Office of Management & Budget has asked the FHA to (at least) hold off on implementing this program. The FHA’s bridge loan program is only a proposal at this time. I’ll keep you posted…

There is great news for first time home buyers… HUD Secretary Shaun Donovan said that the Federal Housing Administration (FHA) is going to permit its lenders to allow first time home buyers to use the $8,000 tax credit as a downpayment.

Donovan made the announcement today at the National Association of Realtors (NAR) Midyear Legislative conference in Washington, DC. “We all want to enable FHA consumers to access the home buyer tax credit funds when they close on their home loans so that the cash can be used as a downpayment,” Donovan said.

According to Donovan, the FHA’s approved lenders will be permitted to “monetize” the tax credit through short-term bridge loans. This will allow eligible home buyers to access the funds immediately at the closing table.

Not sure what the cost of the bridge loan to home buyers will be. I have calls out to various lenders/loan officers now to see what I can dig up – I’ll keep you posted.

Changes to FHA Guidelines Mean More Money Down

Changes to FHA guidelines going into affect January 1, 2009 will make it more expensive for borrowers to use FHA financing.

Current FHA guidelines require a borower to make a 3 percent total investment in a home purchase.  A little more than 2 percent is required to go toward the down payment and the balance can go towards closing costs.

Beginning January 1, 2009, the minimum required investment will be 3.5 percent and the whole amount must go towards the down payment.  This means that all of the closing costs will be required in addition to the 3.5 percent down payment.

There are also changes being made to the FHA streamline refinance program. For a complete list and explanation of those changes, check out this blog post over at fhaloanadvice.com.