The Real Story…
News and commentary about the real estate market and related topics.
Dave Parrish, ABR®, CRSA, CSP, GRI, ePRO®,REALTOR ®, RealtySouth
The opinions expressed here are my own and don’t necessarily represent those of HomeServices South.
Buyers and Sellers Be Aware of the Effect of Upcoming FHA Changes…
We take long-term mortgages for granted today, but it wasn’t always that way. Long ago it was likely that if you financed a home you borrowed money with a five-year “term” mortgage — and even then you needed 50 percent down. FHA was the beginning of what we know as the American Dream!
The FHA loan program allows buyers to purchase a home with a low down payment and flexible guidelines, as compared to most other options…In Alabama the FHA loan limit for a single-family unit is generally $271,050 with the only exception being Baldwin County where the loan limit is $285,000. FHA has become the most common method of mortgage financing in the current economic environment.
It is important that FHA stay healthy; for without this government-sponsored program to insure home mortgages, home values would plummet.
Last fall, the FHA said its cash reserves had tumbled to 0.5 percent of its loans outstanding, far below the 2 percent mandated by Congress. As a result in January of this year, FHA announced that it would be making changes to the program to keep the program on a self-sustaining basis as mandated by congress.
In a nutshell the changes proposed at that time were:
- 3% limit on seller contributions (Down form 6%)
- 10% down payment for borrowers with less than 580 FICO score
- FHA Insurance “Up Front Fee” will increase to 2.25% (Of money borrowed) but can be
rolled into loan - Possible increase in FHA insurance “annual fee” (Broken down and paid monthly)
- One Year Temporary Waiver, for 90 day “flipping” rule
At that time the implementation dates for these changes were yet to be determined.
At the beginning of this month (August 2010), FHA announced implementation of a portion of those new rules dealing with Mortgage Insurance Premiums (MIP). In that announcement, FHA Commissioner David Stevens stated that upfront premiums for FHA mortgage insurance would be rolled back from 2.25 percent to 1 percent on Sept. 7, while annual premiums would nearly double.
It was announce this week (week of 8/9/2010) that implementation of these new requirements would be delayed to October 4th to allow lenders time to update loan disclosures and computer systems.
Under the new guidelines, closing costs will be reduced and monthly payments raised. The net effect, while increasing homeowner costs, is not expected to measurably impact the buying market. However, that does not mean that it will not impact buyers… some negatively and some positively.
On the positive side, buyers who were previously short of funds for closing costs may now be able to close their loan. This positive impact, however, is probably extremely limited, as it is currently the norm for sellers to assist with closing cost. That assistance is presently capped at 6% of sales price and under new FHA guidelines (implementation date yet to be announced) the amount of sellers’ assistance will be limited to 3%. Movement toward including the bulk of the MIP to the monthly payments should prove beneficial to most buyers in terms of the total cost of mortgage insurance, as most buyers will sell or refinance within 7 years.
On the negative side, the monthly payments will increase to cover the increased monthly MIP payment. Some buyers who may have previously qualified for loans based on the current DTI (Debt-to-income) ratio, will no longer qualify. Seems to me the negative impact is much more substantial than the positive impact when you look at what is actually happening in the market today.
To understand the impact of these changes, let’s look at the impact on a home purchase at a price of $100,000. Under the current guidelines, the MIP would add an upfront closing cost of $2250. Under the new guidelines, the MIP component of closing cost would be $1000. When you look at today’s norms the benefit is actually realized by the Seller who more times than not is paying most if not all of the closing costs.
Now looking at the same transaction, the purchasers monthly payment would increase by $29 per month. New Annual MIP is .90% per year on the outstanding balance versus .55% under existing requirements (based on loans representing more than 95% of the sales price (less than 5%down), the rate is .0005% lower for loans representing less than 95% of sales price (5% or more down)).
With the new payment, some buyers will no longer qualify for the same purchase; however, those buyers were already pretty marginal. Their options: look at a lower price range or negotiate a lower price or perhaps better, reduce their debt so that the DTI ratio is less of an issue. . Either way this creates a downward pressure on home prices. Although, I believe the impact to be negligible.
Note: FHA mortgages are subject to MIP until the borrower has 22% equity in the home and has paid mortgage insurance for 5 years. MIP is avoided completely in 15-year mortgages with 89.99 percent loan to value.
For the majority of refinancing FHA homeowners and homebuyers, the MIP change is neither good nor bad – things will just look a little different. It’s true that loans will cost more per month, but also true they’ll be less expensive to obtain. It’s a trade-off requiring you to evaluate your individual circumstances to decide the best time to apply FHA.
So while neither sellers nor buyers will celebrate these changes, it was absolutely necessary for FHA to take these actions. It is not kind nor does it make sense to put people into homes that they cannot afford. In terms of what actions should be taken by the respective groups…
Buyers: Reduce your debt, become fiscally responsible so that you can afford the home you want.
Sellers: Be ready to price your house right and willing to negotiate to make your deal work. The buyer pool for your house may well be shrinking!
To ALL: There is a new window in which to act. Use the new rules to your advantage by negotiating a successful/accepted offer and having your FHA loan application in place (with FHA Case number assigned) prior to the new rules taking effect on October 4, if those rules benefit you/your transaction.
Don’t curse the FHA. They are acting responsibly and as required by law! Rather be thankful for FHA. Without FHA Home values would plummet!
May the market be with you.
