FHA Changes 2010

Lots of changes coming down from the Department of Housing and Urban Development (HUD) on FHA Mortgage Loans.  Here is a quick snapshot of what is changing in 2010:

• 90 Day Flipping Rule Waiver (Feb 1)
• Up-front Mortgage Insurance Premium Increase from 1.75% to 2.25% (Apr 5)
• 10% Down Payment Required for Credit Scores < 580 (Summer)
• Max Seller Contributions Decreased from 6% to 3% (Summer)

Here are the details on each of these changes:

90 Day Flipping Rule Waiver (Feb 1)

Posted on Lending a Hand on January 15, the 90 Day Flipping Waiver allows sellers who have owned the home for less than 90 days to sell to qualified FHA buyers.  Prior to this waiver the seller was required to own the property for 90 days before selling to an FHA buyer.

Up-front Mortgage Insurance Premium Increase from 1.75% to 2.25% (Apr 5)

As a part of HUD’s interest in eliminating risk on their FHA mortgage loan product, they have increased the up-front mortgage insurance premium from 1.75% to 2.25%.  This was merely the first step in changing the mortgage insurance premiums.  The next step will be to take legislative action to increase the maximum monthly mortgage insurance premium which will allow a reduction of the up-front premium.  We will have to wait and see what happens on this.

To the average customer this means that instead of paying an additional, one time fee (paid at closing or financed over the term of your loan) of 1.75%, the fee will now be 2.25%.  In terms of numbers let’s look at an example.  On a $200,000 FHA mortgage that means the cost now (1.75%) would be $3,500.  With the change to 2.25% the new cost would be $4,500 or $1,000 more in this example.  For most FHA buyers, this will increase their payment about $5-7/mo since most opt to finance this cost into their mortgage.  Not a huge impact, but still an extra $1,000 on the loan that isn’t there now.

10% Down Payment Required for Credit Scores < 580 (Summer)

Although not yet passed, this is likely to go into effect early Summer after the required process completed by HUD.  The change will require any customer with a credit score less than 580 to put 10% down on FHA loans instead of the normal 3.5%.  Currently there are very few, if any, FHA lenders willing to approve a customer with a credit score below 580 so very few potential customers will be impacted by this change.  What may happen, however, is that more FHA lenders will allow for lower than 580 score since they will be putting 10% down.  Another one we will have to wait and see what happens.

Max Seller Contributions Decreased from 6% to 3% (Summer)

The same process required on the 10% down change must occur before this change can go into effect.  Currently sellers can contribute as much as 6% towards closing costs, prepaids and up-front mortgage insurance premiums on FHA mortgages.  This change will reduce that to 3%.  Conventional mortgage loans have been capped at 3% so this isn’t something that will likely impact most people.  Those that this will impact is the lower purchase price buyer.  Let me show you why in two examples:

FHA Mortgage, 30 Year Fixed, 5% Rate, $100,000 Purchase Price with 3.5% Minimum Down

• 1% Origination Fee = $965
• Typical Closing Costs (excluding origination fee) = $1,300
• Typical Prepaid Expenses = $1,000
• Typical 3rd Party Fees = $850
• TOTAL = $4,115 (4.12%)

FHA Mortgage, 30 Year Fixed, 5% Rate, $300,000 Purchase Price with 3.5% Minimum Down

• 1% Origination Fee = $2,895
• Typical Closing Costs (excluding origination fee) = $1,300
• Typical Prepaid Expenses = $2,960
• Typical 3rd Party Fees = $850
• TOTAL = $8,005 (2.67%)

In these two examples, one at a low price and the other at a higher price, the percentage of total closing costs is much higher on the lower purchase price (4.12%) compared to the higher purchase price (2.67%).  The reason this happens is because most closing costs stay the same.  The only things that change are the origination fee (because it is a percentage of the loan amount) and the prepaids (because it varies based on the value of the home).  Under this new rule, if you were the $100,000 buyer and wanted to ask the seller to pay for all of your closing costs and prepaids you would be limited to 3% or $3,000 leaving $1,115 left for you to pay.  If you were, however, the $300,000 buyer you could ask for the full 3% and have money left over (which, by the way, is not allowed on FHA).

Those are the changes that are already approved to go into effect or will likely be changed later on in 2010.

Lending a Hand

Scott Wynn

The Wynn Team