FHA Increasing Premiums, Reducing Seller Concessions – One More reason For First Time Home Buyers to Buy Now
20th January 2010
FHA is making changes to insure their long term survival and increase their reserve fund,
and these changes mean it will be more expensive for home buyers. FHA has been talking about these changes over the last several months, but now it is official. The biggest change is an increase in the Up-Front mortgage insurance FHA charges on every loan. FHA doesn’t make loans, they act as a mortgage insurance fund insuring lenders against loan losses through the mortgage insurance charged on each loan. FHA handles this in two ways, a small (compared to conventional mortgages) monthly charge, and a large chuck up front, which is usually financed into the loan. The up-front MIP (mortgage insurance premium) is currently 1.75%, but with this announcement it will soon increase to 2.25%.
The way this works, if a first time home buyer or other buyer buys a home at $100,000 with a minimum 3.5% down payment, they will have a mortgage of $96,500 plus the new Up -Front MIP (2.25%) of $2,171, so the actual mortgage will be based on the adjusted price of $98,671. If the interest rate on the mortgage is 5.25%, the mortgage payment would be about $545 per month, $21 more than the payment with the current premium . This change is due to go into effect this Spring.
The other major change is a reduction in the FHA allowed seller concession from 6% of the purchase price down to 3%. This brings FHA in line with conventional guidelines,. The seller concession is usually used to pay for the buyer’s closing costs, and allows buyers to buy a home with out having a lot of extra costs beyond their minimum down payment. This change won’t have much of an impact on most home buyers. Even in higher cost areas like Chicago (which has a high buyer paid transfer tax) 3% is enough to pay for most costs the buyer will take on. The people who this will affect the most, are those who are buying lower priced homes. If a first time home buyer is buying a $250,000 home with a 3% seller concession this is $7,500. If they are buying a $50,000 condo it is only $1,500, which when you figure in bank costs, title charges, attorneys fees transfer tax and the like, this won’t be nearly enough to cover the costs. So buyers of lower priced units will need to save more before they can buy. This change is not likely to happen until Summer.
Other changes include an increase in the minimum credit score required for FHA to 580, but almost all the lenders have already increased their FICO requirements to 620, so this should have little or no effect. FHA also announced that they will enhance monitoring to increase enforcement on FHA lenders to make sure they are adhering to all the rules and guidelines.
FHA still offers a 3.5% down payment and it still offers terms which are better for most first time home buyers, or anyone else who is buying with a lower down payment. These are all common sense guidelines, and though it will make financing a little more expensive, the health of the program for the long term makes this a good trade-off. But if you are a first time home buyer in the market to buy, this gives you one more reason (along with the $8,000 first time home buyer tax credit and record low mortgage rates) to buy now, instead of putting it off until later.
,Peter Thompson 630-479-6424
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is that a record number of homeowners are in default and can’t pay their mortgages. A home foreclosure is a tragedy for the home owner and a problem for the community. The wave of foreclosures has also wreaked havoc in the mortgage industry. I don’t have much sympathy for the banks that made the loans because they knew what they were doing, or should have, and they made too many risky loans when the housing market was riding high. But the foreclosure wave has also had a big impact on the buyers who want to buy a home now, and it is effecting what they can afford and how they can qualify.

market) is about to roll out the newest version of their Automatic Underwriting System (AUS), DU 8.0. Most loans are now approved through an AUS which is a type of artificial intelligence program. The systems grade each loan for risk and produce a decision which says whether the loan meets their standards, or not. Getting an AUS approval is just the first step. We still have to make sure that all the information entered into the system is correct (garbage in – garbage out) and even if the loan meets Fannie Mae’s guidelines, we need to make sure it fits the extra lender requirements and do all the other things needed to approve a loan. But the odds of getting a conventional loan closed without an AUS approval are beyond slim. It’s not going to happen. So when a new AUS system comes out, this is a big deal. Home buyers who are qualified to buy under the present guidelines, may not be able to qualify under the new rules. And with the release of DU 8.0, a lot of buyers are going to be outside looking in.
ressure to increase their loan quality and up their reserves. FHA has already announced that they will be tightening their guidelines too, but because FHA financing was just a sliver of the market when the housing bubble was expanding, it doesn’t have the same level of problems that its conventional cousins do. Also, FHA is set up as a way to make financing affordable for more home buyers, so even as they tighten, they will still offer more opportunities to qualify. FHA has a stated back end ratio of 43%, but when run through the AUS much higher ratios are common. You are only hurting yourself if you buy more than you can afford, but there are so many situations where a one size fits all approach doesn’t apply. It’s good that is still an option. At least for now.
low rate for the long term, lower your payment and take some pressure off your budget. The rates now are the lowest I’ve ever seen and I expect when we look back at this a few years from now, they will seem like the bargain of a lifetime. But while rates are low, if you have compared rates you see in the newspaper or on-line, you might think rates are better than they really are. You might also see that some lenders are showing much lower rates than others, when the reality is that we all get our funds from the same sources, and the true rate shouldn’t vary from one lender to the next by more than an 1/8 or 1/4 of a percent. So what gives? Why are some lenders able to show such low, low rates? Are they really able to do something that other mortgage lenders aren’t able to do?
The second step is, how much it will cost to refinance?
it is still up near the highs for the year. Oil and gold have had major run ups, and the dollar keeps getting smacked around on the currency market. The government holds new auctions for debt nearly every week and the money supply continues to grow. The economy is still soft, but we are long past the panic and slowly moving forward. At the same time, the Fed is nearing the end of its commitment to buy mortgage backed securities to keep rates low (the Fed has purchased over $1 trillion out of $1.25 trillion promised). All these are usually signs that inflation is heating up, and that mortgage rates should be rising. But rates stayed flat this week, near the lows of the year. What gives?
With Thanksgiving on Thursday, this is a short week for the markets. Most of the activity will be on Monday and Tuesday before traders leave early on Wednesday for the extra long week. Existing home sales, the GDP, and consumer confidence measures will all be released this week, as well as several new auctions of government debt. With the shortened week expect more volatility in mortgage rates. Let me know if I can help you with refinancing your current mortgage, or helping you with your loan when you buy a new home. The
and expanded
This is good news for home buyers, and though I don’t see this making a big difference this year (home buying always goes down in December), it should make for a strong, and fast start for the market next year. The move up buyer credit will help some, but this is more a case of an added bonus than something that will really get homeowners to sell their homes and buy a new one. Too many homeowners have lost equity in their homes and aren’t able to take advantage of the offer, even though they may have outgrown their current home. Also, the first time home buyers in the market are usually looking for bargains, and they are concentrating on the foreclosures and short sales that are priced the lowest. If these homeowners can’t sell their homes, they won’t be able to move up to a new one. But for those who have equity and can, this is one more reason to take advantage of the low mortgage rates and low home prices available now. If you are looking to buy a new home, the first step is a
dead line from November 30th on to April 30th for getting a home under contract, and another 60 days to close the loan, making the credit available for closings up to the end of June. The proposed bill will lower the amount of the credit from $8,000 to $7,290 (or 10% of the sales price, whichever is less) and make the credit available to move up buyers who have owned their home for at least 5 years. Under the proposed agreement, the income caps for first time home buyers would remain at $75,000 for individuals and $150,000 for married couples, but move up buyers would still qualify with incomes of $125,000 for individuals and $250,000 for married couples. This bill will be added to an unemployment benefits extension bill, and Bloomberg is reporting that there are enough votes committed to pass the bill.
this year, it might be time to look at it again and see if lowering your mortgage rate and payment would help you now. A few years back refinancing your mortgage was an automatic any time that mortgage rates dropped. It is more complicated now because mortgage guidelines have gotten tighter, making it harder for some to qualify, and with home prices down it isn’t a slam dunk that your home will appraise out to the value needed. But there are programs which make it easier to refinance even if you don’t have a lot of equity (or none) in your home.
will give you the amount of months that it will take to pay off the closing costs and break even on your new loan. For example, if it costs you $1,600 (this is what I am currently quoting for bank fees and title charges for a no point loan in the Chicago area) and you are saving $50 per month, it will take you 32 months to break even, and every month after that you will be saving money.