If you are a first-time home buyer, you may be affected by an increase of fees to secure an FHA-backed loan.
The FHA does not make the loan. It just insures that you, the buyer, won’t default on the loan. With so many defaults recently, they have had to pay out a lot. Like any insurer, if they have to pay out more, you, the customer, have to pay more to get insured.
This is how it works: typically, when you get an FHA-backed loan you only have to pay 3.5% down. But you have to pay up to 1.75% of the loan amount in the form of an insurance premium against default. That amount is about to go up to 2.25% for reasons outlined in this Wall Street Journal article.
But there is more. You may also be limited in the future to how much of the closing costs the seller can pay for you. Currently, the seller can pay up to 6% of the buyer’s closing costs. The FHA may reduce that to 3%, as they believe that the 6% rule encouraged people to pad prices of homes too much.
Also, if you have a credit score of under 580, you are likely going to have to front 10% of the loan, rather than the typical 3.5%.
Finally, there is also talk of increasing the 3.5% down payment to 5% sometime this year.
All of this is because the FHA is backing many loans across the country and is fearful that it needs to do more to prevent
I asked one of my mortgage broker friends, Dan Hlava of Met Life, if this is effective immediately. He tells me that, yes, all of this is true, but that it is not something to be alarmed about for the average buyer. It really depends on your score. “Met Life does not lend under a credit score of 620, so that 10% down part of it does not apply to us.”
As for the premium, the average person with a reasonable credit score is not going to see a higher insurance premium. However, in those instances where your credit score is lower than 600, that is when you are going to see higher costs.
According to Nova Home Loans broker Jeannie Bolger, “This is not going to happen tomorrow. But if the FHA does change the guidelines, it will likely happen sometime over the summer.”
The moral: if you are thinking of buying a home this year, this is another reason to do it sooner rather than later.
Other reasons:
1) Interest rates will probably start going up in March.
2) People will be flooding the market again looking for the $8,000 tax credit.
3) There will not be a flood of new foreclosures entering the market.
Call me if I can help!