What's Up With FHA?
FHA announced this week it will seek to implement changes to current policies. These changes are all restrictive and have a significant impact on the real estate buying public.
You can read all about the changes here: FHA Announces Policy Changes to Address Risk and Strengthen Finances
For those less inclined to sift through all the beauracracy ... here's a quick snapshot:
- The upfront mortgage insurance premium will increase by 0.5% from 1.75% to 2.25%
- The maximum seller concessions will decrease from 6% of the sales price to 3% of the sales price
- There are some credit score/LTV limitations that should not affect “A” paper lenders
When Do The Changes Go Into Effect?
FHA will issue a notice and have a comment period on most of the items prior to implementation. There's no hard date for conversion but, per HUD, the changes will go into effect in the spring or early summer.
Why This Impacts You...
It's safe to assume it will get harder to get a loan within the next 3 to 6 months. And the seller concession limitation will make it more difficult on homebuyers in the "lower" price ranges, for sure.
The biggest challenge will be the sellers concessions reduced to 3% instead of 6% for buyers purchasing with smaller loans.
For example, for a home buyer purchasing a $100,000 home with 3.5% down the closing costs are approximately $3,444 and the pre-paid reserves (property taxes, insurance, escrow establishment, etc) are approximately $1,051. That's about 4.5% of the purchase price. Which means when these changes are in play, this buyer needs an additional 2% they woudn't have needed before the change.
($150,000 price with 3.5% down the closing costs are approximately $4119 and the pre-paid reserves are approximately $1561. Total cc and pp are 3.7% of the price; requiring an additional 1.2%)
An Alternative Approach For Making Homes More Sale-able...
So how do Seller's deal with a shrunken buyer pool and increase their chances of selling when it's hard for their buyer's to get a loan? The resolution is to have your buyer go out at a bit higher on their interest rate and reduce the origination fee and some of the costs associated with buyer financing. For example, as of yesterday, charging .25% higher in rate allows a lender to absorb 1.25% in closing costs. On $100,000 purchase, that's $1,250 less the lender needs to collect for closing costs. And on a $100,000 purchase price it makes a $15 a month difference in payment (150,000 purchase price it made a $23 a month difference in payment).
This idea of raising the interest rate may not, at first, be attractive to most buyers but with the appropriate positioning by a savvy Seller it could make the difference between a sale or no sale.
Would love to hear your thoughts...