FHA – Confusion and a 50% increase in downpayment requirements?

HousingWire has an article about the proposed legislation and what it might mean for FHA borrowers.   Let me attempt to clear a few things up:

• It used to be that when calculating the FHA maximum loan amount, some of the closing costs were factored in to the “acquisition cost.”   So, if you were buying a house for $100,000, the down payment calculations would have been based on an acquisition cost of $101,500.    That went away already, at least a year ago, though I don’t recall the exact date it disappeared.
• The only closing costs that are allowed to be financed at this point is the Upfront Mortgage Insurance Premium.   Here’s an example of how that works:   If you are buying a house for $100,000, your base loan amount would formerly be $96,500 (3.5% down).   Then the Upfront mortgage insurance premium would be added back to your loan and you’d end up with a loan amount of approximately $98,200 (financing a 1.75% MIP fee).    That puts your effective equity position at less than 2%.
• Your cash needed would be a 3.5% down payment ($3500) and let’s just estimate $3,000 for closing costs and prepaids, so you’d have $6,500 you’d have to come up with.

Under the new proposed legislation, here’s what I expect would happen:

• You purchase a house for $100,000, your minimum down payment would be 5%.   That would put your base loan amount at $95,000.   
• The new rules wouldn’t allow any closing costs, fees or any such things to be financed, so your final loan amount would be $95,000.
• Your cash needed would be the 5% downpayment ($5,000), $3,000 for closing costs and prepaids (estimate), plus an additional $1750 (also estimated) for the up front mortgage insurance premium.
• That would bring your cash to close to approximately $9750.   
• That’s about a 50% increase in down payment and cash to close requirements.

Now a couple of thoughts about the entire process:

• What I’ve read of the proposed legislation doesn’t specifically address the up front mortgage insurance but it seems like a total elimination of financed charges of any sort is in the “cards.”
• Studies have shown that there is a direct correlation between downpayments and the likelihood of default.
• FHA is running out of money.   
• So we’ve got to expect that there will be tightening of the regulations and underwriting requirements.
• The legislation is “proposed.”   That means it’s not passed yet.

Hope that helps clear up a little of the confusion.

I’ll have more about it as time marches on.   In the mean time, if I can be of help, give me a call at (616) 292-7559 or e-mail me at tvanderwell@straighttalkaboutmortgages.com.

Tom Vanderwell

FHA Confusion Surrounds Mortgage Finance Regulation Change : HousingWire || financial news for the mortgage market

As new housing finance regulations take effect and even more are set for the beginning of 2010, a number of questions have arisen on the impact to Federal Housing Administration (FHA)-insured loans.

A bill that calls for an increase to the down payment requirement for FHA loans from 3.5% to 5% would also prohibit borrowers from including closing costs in the principal of the mortgage.

But, is this provision actually a practice already in place?

Many originators have told HousingWire they’ve operated for the last year under a directive from the Department and Housing and Urban Development (HUD) prohibiting the practice.

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