Friday, January 22, 2010

FHA loans keep getting tougher for Buyers

By Brandi Fugate, Branch Manager
Friday, January 22, 2010

This week was not a good week for potential FHA borrowers. Not only did HUD announce plans to increase the up front Mortgage Insurance Premium (UFMIP) from 1.75% to 2.25%, but HUD also plans to lower the allowable amount of seller concessions (the amount of closing costs that the Seller can pay on the Buyer's behalf.)

In the past a Buyer purchasing a $100,000 home would have financed $98,188 which includes the $1,688.75 UFMIP fee. Now, however, that same Buyer would have to finance $98,681 which includes the higher $2,171.25 UFMIP fee. This doesn't make a HUGE difference for the Buyer, however, as the monthly payment would only raise $2.60 per month, or $936 over the 30 year life of the loan. Since the amount of the UFMIP fee is always added to the loan amount, or "rolled in" to the loan, this change alone does not have an extreme consequence for the Buyer.

What makes a bigger difference for Buyers with this new HUD announcement, is the lowering of allowable seller concessions. Seller concessions refer to the amount of the Buyer's closing costs that the Seller can pay on behalf of the Buyer. Typically closings costs and prepaid items (those charges covering a Buyer's prepaid interest, homeowner's insurance, and property taxes) will cost in the neighborhood of 6% of the sales price, assuming a minimum of $100k sales price (lower sales prices may result in closings costs exceeding 6%, as the dollar amount of the percentage is lowered yet costs remains the same.) In the past the Seller could contribute a total of 6% to cover these items, which generally meant that the Buyer did not have to pay out of pocket for any of their closing costs and prepaid items. The new HUD rule caps the Seller's credit to only 3%.

How does this hurt Buyers? Well, quite simply less Buyers will now be able to qualify for FHA financing. Now, on that $100k home, a Buyer would not only have to save their 3.5% down payment ($3,500) but also save roughly $3,000 in closing costs and prepaid items. That's an estimated $6,500 needed to buy a $100,000 home, up from only $3,500 previous to this week's announcement.

Of course Buyers have another option, not that this option is a great long term decision. Banks typically charge a 1% origination fee or 1 "point" to the Buyer. This fee is generally included in the seller concessions. However now that maximum seller concessions are lowering, the Buyer has the right to request that the bank waive their 1% fee in exchange of accepting a higher interest rate. This will lower the Buyer's closing costs by 1%, or $1,000 for that $100k house. In this example the Buyer would now only need $5,500 to buy that $100k home.

But do the math before you choose this option. For a bank to waive their 1% fee, your interest rate could go up by 0.25%. This would add roughly $15 per month on our $100k home scenario. That's over $5,000 that the Buyer would pay in interest over the 30 year loan term. Is paying more than $5,000 over the next 30 years worth saving $1,000 now?

The good news is that FHA is not a Buyer's only loan option these days. If a Buyer is willing to consider purchasing a home outside of Tulsa city limits, the home may qualify for USDA financing. USDA loans do not require a down payment at all, nor does this loan require that the Buyer pay their closing costs and prepaid items out of pocket. All costs associated with this loan type are allowed to be included, or "rolled in", to the loan amount, assuming that the house appraises high enough that the loan amount (including closing costs) does not exceed the appraised value of the home. To find out if a home that you are interested in qualifies for USDA financing, give your Neighborhood Mortgage Group a call.

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