In a sweeping move, the Federal Housing Authority (FHA) has changed its policies, specifically the up-front costs, for obtaining an FHA-guaranteed loan. The changes include:

Mortgage insurance premium (MIP) increase from 1.75% of the loan amount to 2.25.%

Mortgage insurance premium, or MIP, is an insurance policy taken out by the lender, in this case, the government, to protect it against loan default. So if a borrower defaults it is the MIP investment pool that is intended to cover the lender’s loss. On the purchase of a $150,000 home with 96.5% financed/3.5% down, the policy change means the MIP will increase from $2,533.13 to $3,256.88, a $723.75 change. Often times the MIP is financed back into the loan and is not paid out-of-pocket.

Borrowers with credit scores below 580 will need a 10% down payment, compared to 3.5% for borrowers with credit scores above 580.

While this change looks incredibly challenging, very few lenders will originate a loan with a borrower’s FICO score below 580, so very few prospective borrowers will be affected by this change. On a $150,000 home, the down payment would increase from $5,250 to $15,000 for borrowers with a FICO score below 580.

Allowable seller contributions will decrease from 6% to 3%.

The policy change regarding contributions appears to be significant on the surface, but in practice it will have only a small impact on the consumer market. Most offers we write where the buyer is requesting closing cost assistance are for a 3% contribution anyway. Our experience is that 3% is sufficient to cover all or nearly all of the buyer’s normal closing costs and pre-paid expenses.

Additional amounts above the normal 3% may be used to pay down buyer’s debts in order to correct their debt ratios or to buy down interest rates. One of the reasons we typically don’t see this option used is out of concern that the subject property will not appraise for an amount that it 6% over the contract price.

FHA is implementing these changes as a matter of risk reduction. Their hopes are that by making these changes, which should begin sometime this spring—FHA wasn’t specific on their timeline–they will stem the tide of defaulting loans with minimal impact on consumers.

Alex Casteel
Realtor, MBA, CDPE

alex@azreg.com
www.AZREG.com
480.373.9695