Financing a home is all about risk. If you have been waiting for house prices to drop more so you can take advantage of historic low interest rates, you risk losing out. We currently have some of the most flexible buyer-financing benefits in recent times with the Federal Housing Administration. Yet ongoing policy changes for FHA financing rules will make loans harder to get and require more upfront cash. After speaking with Richard Mantyla of Residential Mortgage, here are a few of the changes headed our way.
CHANGE 1: SELLER-PAID CLOSING COSTS
Sellers will no longer be able to pay up to 6 percent of the buyer's closing costs to help purchase the home. New rules will roll back seller's contributions to 3 percent maximum, similar to Fannie Mae or Freddie Mac conventional financing guidelines.
For example, on a $200,000 home loan, sellers can currently contribute up to $12,000 (6 percent) toward buyers' closing costs, reserves and repairs, as long as the buyers have 3.5 percent of their own funds for the down payment.
Under new rules, only $6,000 (3 percent) would be allowed, requiring a buyer to have more upfront cash at closing. This change reduces the lender's risk that seller concessions could artificially inflate property values, and FHA would start out by insuring a home already under water.
CHANGE 2: MORTGAGE INSURANCE PREMIUMS
Mortgage insurance is a capital reserve fund that protects lenders if the buyer defaults. Buyers pay into this reserve with an up-front fee at closing and in each monthly mortgage payment. With our recent foreclosure crisis, this reserve has been strained. Effective beginning this month, FHA can make the following fee changes:
• Reduce the upfront fee from 2.25 percent to 1 percent of the loan amount. At first glance this reduction would seem a beneficial step. However, you will notice this change in the monthly payments.
• For loans with 5 percent to 20 percent down, the maximum annual mortgage insurance premium increases from 0.5 percent to 1.5 percent. For loans with less than 5 percent down, the maximum premium increases from 0.55 percent to 1.55 percent.
FHA has not yet increased to these maximum rates but has taken a partial step of 0.85 percent for loans with 5 percent to 20 percent down payments. For loans with less than 5 percent down, the annual premium is 0.90 percent.
For the average buyer, this charge will continue as part of the monthly mortgage payment until the loan-to-value reaches 78 percent and mortgage payments have been made for at least five years.
CHANGE 3: CREDIT SCORES
FHA's lenient rules previously let buyers with low credit scores qualify for a home loan without an overt penalty. Now FHA will mirror other conventional financing. FHA will increase the interest rate for buyers with low credit scores.
Additionally, your credit score will not only affect your interest rate, but it could increase the amount of the down payment required by your lender up to 10 percent. On the same example of a $200,000 loan, the minimum 3.5 percent down payment of $7,000 would increase to $20,000.
CHANGE 4: CONDOMINIUM APPROVALS
Condos have long been the first step in a home purchase for new buyers. However, many owners pay into the maintenance and upkeep of a condominium's common areas, and a condo's overall financial viability can be affected by too many delinquent dues, excessive rentals or large numbers of foreclosures.
A national requirement for more intensive reviews of individual condo projects is under way and could hold up your purchase if an association is not proactive before new requirements are put in place.
A couple of the must-have criteria include that at least 70 percent of the units be owner-occupied and less than 15 percent of the units in foreclosure. Without financing approval for a condo project, the only real sale possible is with seller- financing or cash.
LESS HOUSE FOR SAME MONEY
So those are just a few of the risks of inaction. Once the real estate market bottoms out, look for interest rates to start rising. Because most people focus on what their monthly payment is, you will find yourself purchasing less home to keep the same monthly payment. For every 1 percent increase in interest rates, you lose 10 percent in borrowing power. So in essence the longer you wait, the less you will be able to borrow if you want to keep the same monthly payment.
The times when virtually anyone could obtain a home loan are gone. As these and other FHA changes take effect, your ability to obtain a home loan could evaporate in the future.
Clair and Barbara Ramsey are local associate brokers specializing in residential real estate. Their column appears every month in the Anchorage Daily News. Their e-mail address is firstname.lastname@example.org.
BARBARA AND CLAIR RAMSEY