FHA loans really won't cost that much more!
Lots of buzz this week about the Federal Housing Administration raising the costs of FHA loans, how they're raising the "up front" mortgage insurance premium; the annual premium, the down payment requirement for the scores and scores AND SCORES of people who are financing through FHA with <580 credit score, and reducing the max seller concession from 6% to 3%, and apparently these changes are apparently going to catapult us back in to recession.
Wow. Will you allow me to clarify a few things?
On a $250,000 purchase price, here's how these changes translate:
1) The "up front" mortgage insurance premium is financed in to the loan 99.99999% of the time (in all fairness, the actual percentage probably has less decimal places). The fee is going up 1/2%, so if they choose to finance in this fee as most do, it will raise their payment by about $6.50/month. Probably not a reason to decide NOT to buy a home;
2) Let's say the annual (paid monthly) premium goes up 10% for SOME borrowers (haven't release which borrowers this will affect or how much, so I'm guessing), that is equivalent to about $20/month. Again, probably not a reason to decide not to buy a home.
In all fairness, these two changes mean that in terms of monthly payment, the buyers are paying about $5,000 more for the home than they were before. In other words, if the home sold for $245K instead of $250K, it would effectively be a wash. I know a lot of sellers who would be willing to take a 2% price reduction if it meant selling their home...
3) For borrowers with less than 580 credit scores, a 10% down payment will be required. This impact is actually minimal, because most lenders have their own requirement for a minimum credit score of 620! One of the reasons they have this is because FHA doesn't have a minimum score, so the lender sets their own. My employer is one of the few lenders that follow the FHA guidelines and don't have a minimum score.
If anything, a minimum credit score of 620 for the lowest down payment option of 3.5% may help more people qualify for an FHA loan!
4) changing the max financing concession from 6% to 3%. Also very low negative impact, because most transactions don't carry more than 3% in closing costs.
Bottom line is this -- don't panic! These are needed changes in order to keep the FHA program self-sustaining, which it has maintained since 1934. So let them shore up a bit, we'll be fine!
Thanks for reading -- James Wirth
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