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NEW FHA RULES WILL INCREASE FEES, REQUIRED DOWN PAYMENTS, AND AVAILABLE FUNDS FOR CONDO PURCHASES!

TIMING OF CHANGES CAN LIMIT PURCHASE OPTIONS, INCREASE COSTS IN A STILL-TROUBLED REAL ESTATE MARKET!

It wasn't that long ago that low-down payment home borrowers, as well as those with less-than-perfect credit, had a number of places to go for their mortgage loans.  As credit markets collapsed, housing values tumbled, here in Chicago and elsewhere, options for these borrowers dwindled.

In many cases, the only option available now is an FHA-Backed Loan, with it's lower overall FICO Credit Score and Down Payment requirements.

Using an FHA Loan, buyers have been able to purchase with as little as 3.5% down for their primary residences.  The FICO Credit Score floor was a very buyer-friendly 500, although most lenders imposed stronger credit requirements for FHA Loans they issued - generally, around 620 Minimum FICO Score.

Buyers could also request a credit toward closing costs from the seller of up to 6% of the negotiated home purchase price, although this often drove the final price of the home higher than if no seller concession had been requested.

To cover the risk of such a loan, all FHA loans required a Mortgage Insurance Premium, paid up-front, of up to 1.75% of the loan amount.  This sometimes-sizable premium could be added to the amount financed by the buyer. 

In addition, new FHA homeowners had to pay an additional 1/12 of the initial MIP on a monthly basis, often adding a couple of hundred dollars to the new homeowner's monthly payment.

For Condo Buyers, New or Existing Condo Projects not having prior approval by the FHA could be Spot Approved for individual unit sales, assuming the project itself had no Right of First Refusal for board purchase in their By-Laws, and the association was fiscally sound and predominantly owner occupied.

Beginning later in 2009, however, according to Chicago Tribune Reporter Mary Ellen Podmolik, FHA Rules are about to get tougher. 

For condo buyers, the FHA Spot Approval option is being eliminated effective February 1st.  To qualify for FHA funding, the complex itself must have been approved in advance of the offer, or before a loan can be closed.  If the condo project is not currently approved, a projected long FHA Approval Timeline could forestall new buyers.

Buyers with lower than 580 FICO Credit Scores will now have to ante up a 10% Down Payment, up from the prior 3.5% level.  This should not impact many new FHA Buyers, however, as most lenders impose a higher 620 Minimum FICO Score anyway.  Some lawmakers, however, have proposed a minimum 10% Down Payment Requirement for ALL FHA buyers, to better stabilize portfolios of FHA loans.

This Spring, the FHA will start requiring 2.25% for up-front Mort age Insurance Premium, a 28.5% increase from current levels.  It is not certain at this point how much the additional Monthly PMI Payments, added to Principal and Interest Due each month, would be increased as well.

Finally, the Maximum Seller Contribution to Closing Costs for FHA Loans would be cut in half - to 3%.  In essence, those buyers with little availability money to go toward closing costs will be impacted here.

The FHA plans to impose its new FICO Score requirement sometime this summer.  The Maximum Seller Contribution reduction to 3% will likely be imposed at about the same time.

Do the FHA changes represent stumbling blocks for many potential homebuyers, at a time when the housing market is trying to recover?  The next few months will tell!

DEAN MOSS & DEAN'S TEAM CHICAGO

Posted: Wednesday, January 27, 2010 2:05 PM by Dean's Team

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