Fairfax, VA – The House of Representatives approved the Federal Housing Administration Reform Act.   The purpose of FHAR is to bring stability to the FHA lending program. Currently, FHA loans make up about 30 percent of the loans originated in the US. This is a far cry from early to mid 2000’s when real estate agents frowned on any government loan of any type.
 
The FHAR Act is a two-step process which was designed to shore up the crumbling foundation of FHA’s capital reserve account.  The first step to increasing the reserve account occurred in April of 2010 as the up-front MIP (mortgage insurance premium) premiums collected from the borrower was increased from 1.75 percent to 2.25 percent of the loan amount.  But the bigger plan was for FHA to increase the monthly mortgage insurance premium which is currently .55 percent for purchase loans with less than 5 percent down payment or refinance loans with at least 5 percent equity to .50% for homes or loans with at least 5 percent or more equity.  Under the law passed today, the agency will be allowed to increase its annual premium to 1.55 percent of the unpaid balance of the loan. The change or increase is expected to be a two part process. The first change is expected to increase annual MIP to from .55 percent to between .85 percent and .90 percent, then increase the annual MIP to the full 1.55 percent later in the year.  The thought from FHA and Capital Hill is that the increase in the annual MIP will allow for FHA’s capital reserves to increase, but with less impact to the consumer since the annual MIP is paid over the life of the loan instead of a lump sum addition to the loan amount at the time of closing. But this is incorrect.

The FHA reserves were getting hammered by homes going into foreclosure or just plain scammers at work with straw buyers or however mortgage fraud is perpetrated.  This is fact. What I am not sure is taken into account is the effect of the higher monthly mortgage insurance will have on the home buying public. How can tripling the monthly mortgage insurance have no impact to the consumer or to the nation’s housing market?  I read a Freddie Mac article in the early 1990’s that stated for every .25 percent increase in interest rates 250,000 home buyers are priced out of the market. To show this is not true see the example below. Using a $300,000 loan amount as the example, the numbers don’t look good for home buyers after September 7^th.   This date can change, call me if you have any questions. 

Fairfax, VA – With the increased role FHA has taken in the lending world since 2007, FHA has experienced an increase of foreclosures which caused FHA to tighten lending guidelines, increase down payment requirements and institute minimum credit score requirements to qualify for an FHA loan.  Here are some changes that have been made or are on the horizon.

Credit Scores – A minimum credit score of 500 is required.  Borrowers with credit scores below 580 would have to put at least a 10% down payment on the property.  Although FHA has minimum scores of 500 and 580, most lenders have score requirements of at least 620 or higher.

Underwriting – Underwriting is a tool lenders use to document information about the property (value) and the borrower (income, credit score, debt).  The underwriting process is used to assess whether the borrower is likely to repay the loan.  Most lenders today use an automated underwriting system (LP - Freddie Mac or DO/DU – Fannie Mae) to get approval of the loan.   If the automated system flags the loan, a more in-depth manual underwriting procedure would take place to ensure the borrower qualifies for the loan.  The underwriter could require additional funds for cash reserves equal to one mortgage payment or explanations or documentation to further clarify certain aspects of loan file. 

Cash-out Refinancing – Is when a homeowner removes equity from the home in the form of a higher loan amount than before the refinance.  Currently a borrower can take up to 85% of the home’s current value.  Previously, this amount was 95% of the home value.  In order to be eligible for a cash-out, you must have excellent credit and have at least 15%  equity after the refinance. (Example: Value $100,000, Owe: $50,000, Equity available is $35,000 less any applicable closing costs.

Seller Concessions – This is a big one.  A seller concession is an amount that is negotiated in the sales contract that the seller will pay towards the buyers closing costs.  The FHA wants to slash allowable seller concessions in half, from 6% to 3%.  Some buyers want to roll in their closing costs, appraisals, etc. into the loan amount. This is not allowed with FHA loans. But this doesn’t ban concessions of over 3%.  What the new guidelines require is a dollar for dollar reduction in the home’s sale price and reduce the amount of the allowable loan.

Short Refinancing – If a borrower has no equity in their home,  they would be allowed to refinance into an FHA loan.  This is on the first loan only.  If there is a second mortgage, the two loans combined cannot exceed the current value of the home by more than 15% once the first loan is refinanced. Not every lender will allow a short refinance since the current service could be losing money by reducing the loan amount.

The Federal Housing Administration (FHA home loans in Virginia) is eliminating one of the mainstays to its program sometime this summer. Gone will be the 6 percent seller concession and in will be the 3 percent seller concession. The reason for eliminating the concession according to FHA is the 6 percent seller concession exposes them to too much risk. This has been one of the key selling points with FHA for decades. But if sellers and buyers move fast there is a possibility they can still take advantage of the higher seller concession.

The buyers must still save or be gifted the money for the down payment to purchase the home. The current minimum down payment is 3.50% of the sales price. The current guidelines on seller concession allow sellers to pay for all of or part of buyers closing costs when purchasing a property.  Items connected with the transaction such as — loan origination and discount points, state and county transfer stamps and fees, an appraisal, inspections, attorney and title closing costs.  

When it comes to lower priced homes, closing and loan expenses typically represent a higher percentage of the total loan closing costs than on higher prices homes. In Fairfax, Virginia and Northern Virginia, closing costs typically run between 2.50% and 3.50% of the sales price of the home. So on a $300,000 home purchase, that could be an extra $7,500 to $10,500 of out of pocket expenses for a home buyer. Current with FHA financing rules, the contract can be structured so the seller agrees to pay all closing costs up to 6% ($18,000) at settlement. This amount could even include some small required repairs.  Once the rule change takes effect, the max concessions will be a flat 3% of the sales price.

If you use Fannie Mae or Freddie Mac financing, seller concessions is generally limited to 3%  for down payments below 20% of the sales price. Although concessions can be much higher when larger down payments are being used.

Bottom line is this: the helping hand of an FHA home loan is getting smaller and smaller. First the down payment was increased from 2.25% (3% in the new home) to a flat 3.50% down payment. Then a minimum credit score, now a decrease of seller concessions from 6% to 3% of the sales price.