Next month, FHA financing will see a couple of major changes that will significantly impact buyer borrowers. Effective April 5th (next month), the upfront Mortgage Insurance Premium (MIP) will increase from 1.75% to 2.25% which increases the loan amount, and as a result the monthly payment. Additionally and more importantly, the seller contribution on FHA financing will DECREASE from 6% to 3%, moving this popular first-time homebuyer financing option in line with Fannie Mae and Freddie Mac.
For the MIP increase, a 1/2 % increase on a typical Birmingham mortgage of say $175,000 means that the buyer's loan amount goes up $875 which isn't really that big of a deal, especially since it is financed and represents a very small increase in the monthly payment amount. But the seller contribution decrease on FHA financing could be a much bigger issue, especially in the Birmingham market where the average sales price is below $200,000. Currently, in a typical first-time homebuyer scenario, a prospect may have pretty good credit and a good job with adequate income but not accumulated cash for the down payment and closing costs. The buyer may be getting a gift for the down payment (typically 3.5%) with the realtor writing up an offer on behalf of the buyer where the seller pays up to 6% of prepaids and then closing costs. On a $175,000 mortgage, 6% is $10,500 so it is easily covers all closing costs and prepaids (assuming you can get the seller to pay that much!). At the new 3% rule, on the same mortgage, $5,250 is probably not enough to cover EVERYTHING and you'd likely be $1,000 or more short depending on a number of factors beyond the scope of this post. When you add up taxes, inspections, title search, recording fees, appraisal, underwriting, hazard insurance, settlement costs and so forth, on FHA financing transactions, the total accumulates quickly.
So then take FHA financing on a deal that is say $150,000 or $135,000 and you get the picture. With the decrease in the allowable seller contribution to 3%, some prospects are going to have to come up with some of their own cash and some prospects are just going to have to wait and accumulate some additional cash to get into their dream home. While this is a prudent move economically and financially for FHA, it doesn't come at the best of times given that the federal tax credit for first-time home buyers is set to expire 25 days after implementation of this new FHA financing rule.
Contact my contributor, Jimmy Kernan, Vice President of Regions Mortgage at 205-560-5652 to get prequalified or to answer any questions you may have about available financing programs. Click tax credit to get more information on the first-time or move-up homebuyers tax credit available for contracts signed by April 30th or send me a message at sold@markcrain.com. Go to house search to have homes meeting your criteria delivered directly to your inbox at no obligation!
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