FHA Changes Could Have Substantial Effect on Condo Buyers

February 8, 2010
3 Comments

by Tim Brown

A few weeks ago, the Federal Housing Administration (FHA) introduced several changes to the guidelines it uses to lend mortgage products. The changes, which were mainly aimed at replenishing the FHA’s dwindling capital reserves, do not come as good news for many prospective homebuyers.

The new measures were implemented because the rise in popularity of FHA loans has resulted in a steady drop of the agency’s reserves. (Estimates are that up to 50 percent of new homebuyers are opting for the low down payment loan.) Below are a few of the main steps that the administration is taking to replenish its reserves as well as offset exposure to risky homebuyers:

The upfront insurance premium that borrowers pay at closing will be increased from 1.75 percent to 2.25 percent of the overall value of the loan.
In a measure that will allow the FHA to better balance its risk among a wide variety of borrowers, the amount of money required as a down payment for borrowers with low credit scores will be increased. While borrowers with at least a 580 FICO score will still be able to qualify for a 3.5 percent down payment, those with scores lower than 580 must put up a 10 percent down payment. This change will go into effect in early summer.
The amount of money that sellers can kick in for closing costs will be reduced. Currently, the FHA allows sellers to pay closing costs up to 6 percent of the sale price of the home. The change will reduce the cap to 3 percent. It has been speculated that the 6 percent concession exposes the FHA to excess risk by creating incentives to inflate a home’s appraised value. The reduction will bring the FHA in line with industry standards that already exist for seller-paid closing costs. This change will go into effect in early summer.

The above changes will have the greatest effect on homebuyers who have low credit scores and are without a chunk of cash for a down payment. Jamie Trotter, a loan officer for Monarch Mortgage, told UrbanTurf that the new standards will not only decrease affordability, but will mean that buyers will need more cash upfront.

“A home with a sales price of $200,000 and a 3.5% down payment will now require an upfront mortgage insurance premium of $4,342.50, an increase of $965 from the previous requirement,” Trotter explained.

Erin Hundley, a sales agent for DC’s UrbanLand Company, told UrbanTurf that the update to FHA guidelines for new borrowers with less than a 580 FICO score will “have a negative impact for the small percentage of buyers that fall within this category,” noting that the increase to a 10 percent down payment could potentially eliminate their opportunity to purchase in the current market.

While these changes were needed in order to protect the FHA from running out of money, they will dramatically change the economics of the loans, which have become a very popular source of financing for new condo buyers. Combined with the expiration of the first-time homebuyer tax credit in April, the changes could also have a serious effect on the area’s condo market, which was just getting back on its feet.

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3 Comments

DC Realtor said at 11:02 am on Tuesday February 9, 2010:
Hard choices, but good changes that need to be made. 6% back on 3.5% down was really a 102.5% loan afterall

Tejas said at 5:03 pm on Tuesday February 9, 2010:
I look forward to both federal and quasi-government agencies actually taking a more pragmatic and fiscally responsible lending approach to persons without either a solid credit history or significant downpayment, which hopefully will dry up a pool of buyers, and in turn, forcing sellers to lower their prices.

Jim said at 11:03 am on Wednesday February 10, 2010:
“While borrowers with at least a 580 FICO score will still be able to qualify for a 3.5 percent down payment” = future foreclosure candidate