FHA Changes: How Will They Affect You?Thursday, January 28, 2010
You have heard of the big changes that will take hold this Spring in regards to FHA Financing – but I think it is important to take them in context and see how much (if any) these changes will affect you as a home buyer.
To quickly summarize the changes coming, here they are:
- The Upfront mortgage insurance fee will increase by .500% to 2.25%.
- The seller concessions have been decreased from 6% of the sales price to 3%.
- For credit challenged borrowers (sub 580 credit scores), the minimum down payment required will be 10%.
I think the best way to illustrate this is to use an average home buyer profile and see how the numbers are affected.
Joe is a home buyer and has found a home priced at $250,000. He is planning on the 3.5% down payment option and having his closing costs credited by the seller. The closing costs are $5100 and the prepaid taxes, insurance and interest total $1750 for a total cost to close of $6850. Under the new FHA guidelines, we have 3%, or $7500, that the seller can credit on this price point, so we have the closing costs covered with room to spare.
The upfront mortgage insurance that is financed into the loan would currently total $4221.88 (1.750%). When added to our base loan amount of $241,250 we have a total loan amount of $245,471.88. At a rate of 5% the payment is 1317.75. When the upfront premium is changed to 2.25%, the funding fee for this borrower would equal $5428.13, taking the loan amount to $246,678.13 with a payment of $1324.22. The borrower’s payment is virtually the same, differing by only $6.47.
Lastly, Joe does not have great credit. We review his credit and notice that his mid score is 605. He has some late pays hurting his score but also has a credit card that is maxed out. He holds two other cards but they both have small balances. We advise Joe to transfer the balance across all 3 cards to get his balance on each card below 50% of the limit of each card (preferably below 33% of the limit). Joe makes the changes and we review his score the beginning of the following month – are mid score is now above 620, so we move forward with this loan approval.
FHA lenders (not FHA directly) have typically required borrowers to have a 620 mid score in order to lend to them. There are a few niche lenders that go as low as 530, but they require something else in return which is normally a larger investment from the borrower to offset the risk. The new change being made with FHA will not have much impact other than requiring these niche lenders to obtain 10% down payments on these risky borrowers before FHA will insure the loan.
I hope this example helps illustrate the new FHA changes and their true impact on you as a home buyer. Please call or email me anytime if you have questions.
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