We can all expect some changes in the coming months as the Federal Housing Administration (FHA) works to fix their problems. The first fix is towards their insurance premiums, which will be raised. The second is still only a proposal, but would limit the amount the seller can contribute to the closing costs of a home purchase. These fixes are in response to the FHA not meeting federal mandates which were placed there when they were created.
Since the housing market and banking industry crash of 2008, FHA mortgages have become very popular because they are so affordable for families and first time buyers. FHA mortgages allow first time home buyers or people with poor credit, the opportunity to receive a low rate FHA mortgage as well as have a low down payment. FHA mortgages also allow the seller to pay for up to 6% of the home’s price, which covers the closing cost. The 6% maximum limit is the most recent development that is proposed to change.
The FHA is proposing to reduce the amount a seller can contribute from 6%, down to 3% or $6,000. Previously, a buyer could request that the seller contribute up to $12,000 on a $200,000 FHA mortgage. Under this potential change, the amount the seller could contribute would be reduced to $6,000. Sellers want to make the contribution to the closing cost because it makes the sale easier. It sweetens the deal, so people who are short on cash can afford to continue with the purchase.
Not only would the FHA limit the amount that can be covered, but they would limit the types of closing cost that can be covered. In addition, sellers would not be able to offer to pay for six months-one year of interest payments or Homeowner’s association dues.
These changes are a reaction to the rise in FHA mortgage demand and the low FHA reserves. In this recession, an FHA mortgage is an incredibly viable option for many. Homebuyers have flocked to take advantage of the low mortgage rates, low down payments and a high maximum rate for seller closing cost contribution. They insured 25% of all real estate and more than 40% in metropolitan areas. Unfortunately, there have also been many foreclosures and the FHA’s funds were depleted because they were backing the borrowers in those foreclosures. Typically in the industry, the standard delinquency rate—when a borrow fails to pay the lender on time—is 4.1%. The FHA is experiencing 12.4% delinquency rates. Now, they have to do something about it and re-build their reserves; thus change.
One effect from the change could be that home sellers in certain situations will bring the price down, to make the closing cost that the buyer has to pay more affordable. Another is that more home buyers will be forced to pay for more of the closing costs themselves, which will require a bit more cash on their end. Changes aside, the down payment rate is still the same and the mortgage rates are still competitive. For those who find these changes to be a major problem, act soon so you can avoid them before they are in effect.