FHA Changes – 2009

Effective Jan 1, 2009 FHA has made some changes to their guidelines that could impact those looking to obtain mortgage financing.  As I have stated in previous posts, FHA has become more popular over the past couple of years due to the changing mortgage environment and reduced risk tolerance of mortgage lenders.  FHA, on the other hand, has not changed their guidelines much, so it is not really a surprise that they have decided to make some changes for 2009.  Here is what you can expect from FHA in 2009:

Down Payment

Currently, FHA has a tiered minimum down payment based on the purchase price of the home.  The lower the price, the lower the down payment requirement would be.  Most FHA loans, though, require a minimum 2.85% down payment.  In 2009, this minimum down payment changes to 3.5% and there will no longer be any reduction in down payment for reduced purchase prices.  This makes the calculation for consumers and loan officers much simpler than the way it is structured right now.

Minimum Investment

FHA not only has a minimum down payment requirement, they also have a minimum investment requirement.  So, currently you could put 2.85% down on the purchase of a home and still be required to contribute to some of the closing costs required to make that purchase.  FHA is, again, simplifying the matter and making the minimum investment requirement 3.5%, too.  So now need to complete calculations multiple times to make sure you are satisfying all the requirements of FHA for down payment and minimum investment.  If you meet the minimum 3.5% down payment, you will have met the 3.5% minimum investment requirement, too.

Maximum Loan to Value

Loan to value, or the percentage of the purchase price that is being provided in the form of a mortgage, is also being limited with FHA financing, in 2009.  Up until now FHA did not have a maximum loan to value ratio, even though they did have the minimum down payment and minimum investment requirement, that kept most people from going over 100% LTV.  They have limited it to 100% in 2009 to make sure this does not become a problem.  This will not have an impact on 99% of the buyers out there, because mathematically it will be impossible to exceed the 100% with the 3.5% down payment and minimum investment requirements.  There are some special incentives that are offered when you use FHA financing to purchase a HUD home that could be impacted, but we will have to wait on HUD and FHA to determine how this will play out in 2009.

Maximum Combined Loan to Value

Combined loan to value (CLTV) is very similar to the loan to value calculation except the loan to value only takes into consideration the first mortgage compared to the purchase price (or value, whichever is less).  The combined loan to value looks at all mortgages on the property compared to the price.  This means they take into consideration any second or third mortgages that may be involved.  There will be no change to FHA’s maximum CLTV in 2009.  Currently FHA does not have a maximum CLTV and they do not plan to impose one, at this time, for 2009.  This means that potential home buyers can use the special programs as mentioned in my post about Money for Buying a Home.

Since FHA is the most lenient A paper mortgage product on the market today, it is important to understand these changes.  These will not be the minimum requirements to obtain mortgage financing with an A paper mortgage product.  I hope this has been helpful.

Lending a Hand,

Scott Wynn