With the terms "credit crunch" ,"recession", and "economic crisis" flying around us at every turn, one may ponder exactly what it takes to qualify for a mortgage right now. With the growing list of designated declining markets around the country, qualifying for an FHA-insured mortgage may now be more important than ever.
Before we get into the specifics of FHA qualification, let's take a look at what the declining market designation can mean to you for a Conventional loan if your area were declared declining by the private mortgage insurance companies.
**A 5% down payment requirement would instantly become 10%.
**A mere rate adjustment for credit score would become an outright denial if your score happens to be less than 700. And if your credit score is less than 720 you would need an extra 2 months total housing payment (P-I-T-I) in reserves on top of the additional down payment required.
**Your debt ratio could not exceed 43% regardless of your credit score
Keep in mind this already affects the entire state of California!
Being prepared is really the 1st step. If you have 5% of the purchase price or less for a down payment FHA will now be a superior choice for many homebuyers with all of the additional adjustments to rate for score and Loan-to-value. Many of the FHA purchases I close in areas across the country are what I call "Conventional Fallout" from these exact conditions. Buyers unaware of the market restrictions have written a contract to purchase and must suddenly "change gears" so to speak, when they realize Conventional loan terms are unavailable to them. Once they are referred to me, I often must educate them that FHA is not some sort of subprime program. It's often a superior program-offering MI rates cheaper than the Conventional PMI rates, lower fixed interest rates for maximum financing, and the ability to streamline refinance without an appraisal in the future.
Down Payment Requirement for FHA
With the changes outlined below, FHA now requires a 3.50% down payment-declining market conditions do not apply
Effective January 1, 2009, all FHA purchase transactions now require 3.50% down payment from the buyer. The old guideline was just a 3% "investment requirement" but the loan-to-value was allowed to be 97.75% in some states (if the seller were not paying all of the buyer's closing costs)where 2.25% could be applied toward down payment and .75% of the purchase price could be applied toward closing costs. The new maximum loan-to-value is now 96.50%. The seller can pay all closing costs without affecting this. This new policy is designed to not only mitigate risk but also provide simplification and standardization for all markets nationwide.
Now that you know you need that 0.5% of the purchase price, keep in mind the seller can still pay up to 6% of the purchase price in closing costs and pre-paids. If property taxes or insurance costs are fairly high in your area, keep in mind that your pre-paids may well exceed your closing costs. With a buyer's market advantage in place foreseeable for the coming year, offsetting the down payment requirement with a little extra seller contribution can often be negotiated.
By pre-paids I am referring to:
1) The odd days interest collected from day of close to the 1st of the following month
2) Your 1st year homeowner's insurance premium
3) Your escrow reserves for property taxes and future insurance payments.
Escrowing your taxes and insurance is a requirement on an FHA loan. Even if you have to offer a little extra on your price, with the low fixed interest rates available you are only looking at a difference in payment of less than $6.00 per $1000 borrowed to save yourself from an extra $1000-$3000 out-of-pocket at closing. More money to use for improvements, decorating, appliances, etc!!
Remember also that the 3.50% down payment requirement can also be met with a gift from family member(s). My next post will cover these gift requirements as well as other asset documentation.
NEXT POST: FHA Qualification---Documentation Requirements
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