Be Aware of Upcoming FHA Changes…

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.

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