This week, David Stevens, the Federal Housing Administration (FHA) Commissioner, announced policy changes to how FHA loans will be handled later this year. We don’t have specific dates or all of the fine print yet, but here is the gist of the changes:
The upfront Mortgage Insurance Premium (MIP) will be increased from 1.75% to 2.25% of the loan
This cost is typically rolled into a home buyer’s loan, increasing the monthly payment. The additional half percent MIP charge will result in negligible changes in payment amounts for most borrowers. This change is expected to go into effect in the spring.
New borrowers will now be required to have a minimum 580 FICO (credit) score in order to take advantage of the 3.5% down payment program
This is change is unlikely to impact very many buyers simply because the majority of lenders have been requiring a minimum 620 FICO for some time now. If, however, a lender is making loans to borrowers with credit scores of less than 580, the down payment requirement will be increased to 10%. These changes are expected to be put into place this summer.
A reduction in the allowable amount of seller assistance to FHA borrowers
Currently, the maximum seller contribution towards closing costs and pre-paids is capped by FHA at 6% of the purchase price. The new guidelines will reduce this amount to 3% of the purchase price. This change is also expected to be put into place this summer.
Of the three changes, the reduction in the amount of seller assistance is most likely to impact buyers in 
the New Orleans area. FHA loans made up 43% of the single family home sales on the West Bank of New Orleans in 2009. 53% of the FHA borrowers received some type of seller assistance with their purchase. Of buyers receiving seller contributions in 2009, a whopping 64% received in excess of 3%.
Now, this does not mean that none of the sales would have taken place under the new guidelines. There were many that were just over the 3% threshold that I’m sure would have still closed if the new rules were in place.
However, there were a substantial number of buyers who appeared to get almost all of the money needed to close (except the down payment) in the form of seller assistance. These are the buyers that may be pushed out of the market in 2010 as they will be forced to save longer and have more of their own cash invested in their home purchase.
Don’t get me wrong…I don’t think that having more of a financial stake in a home purchase is a bad thing, as it tends to result in buyers who are truly ready to be home owners.
What’s the possible impact on West Bank home sales?
For buyers, this means you will need more cash on hand for your FHA home purchase. Not only do you need the 3.5% down payment, but the cap on seller contributions towards your closing costs and prepaids (taxes, hazard insurance, flood insurance, lender fees, etc) means that you must have a larger amount of money saved before attempting to purchase a home. For some people, this will result in a longer waiting time until you can buy.
For sellers, this could possibly mean a decrease in the number of qualified buyers for your home. A smaller pool of buyers equates to a reduction in demand. A reduction in demand usually equates to lower selling prices.
If you have been waiting to put your home on the market until later in 2010, my recommendation is to do it as soon as possible – before these changes go into effect, since we do not know what the fall out might be. This advice only applies to those sellers that fall within the current FHA loan limits.
- For more details, read the entire HUD release here
As always, your lender is the best source of detailed mortgage advice for your particular situation. If you need a referral to a local FHA lender, please contact the West Bank Living Team and we would be happy to help you.
For more information about home buying or selling on the West Bank of New Orleans, or relocating to or from NAS JRB New Orleans, please contact the West Bank Living Team.
It would be our pleasure to have the opportunity to assist you with any of your real estate needs and have a little fun while doing it!
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