The Federal Housing Administration has announced changes in fees and other regulations relating to the loans which it insures that affect both first time home buyers as well as those with existing FHA mortgages that are seeking to refinance with new FHA insured mortgages. There will be both winners as well as losers in the coming weeks as these changes are phased in.
The F.H.A. does not make loans, but insures mortgages that meet its guidelines: people with credit scores of 580 or more .An FHA insured loan has been the main stay of the first time home buyer market, requiring down payments as low as 3.5 percent despite the recession and housing bust, growing its market share from 3 percent to 25 percent-plus. The program is now financing 40 percent or more of all new home purchases in some metropolitan areas and is a crucial resource for first-time buyers and moderate-income families. With a maximum loan limit of $729,750 in high-cost areas, it is also a force in some of the country’s most expensive markets — California, Washington, D.C., New York and parts of New England.
But during the same span of rapid growth, FHA’s insurance fund capital reserves have steadily deteriorated — far below congressionally mandated levels. Delinquencies have been increasing. According to the latest quarterly survey by the Mortgage Bankers Association, FHA delinquencies rose to 12.4 percent compared with a 4.1 percent average for prime (Fannie Mae-Freddie Mac) conventional fixed-rate mortgages and 6.6 percent for VA loans.
To increase the quality of the loans that it insures and to make sure buyers have more up front capital invested in the loan thus encouraging the home buyer to stay current on their loan, the FHA plans to impose significant restrictions on the amount of money sellers can contribute at settlements in the near future. The seller-contribution cutbacks could be painful, particularly in areas of the country where closing costs and home prices are relatively high. Here’s what’s involved: Traditionally FHA has been uniquely generous in allowing home sellers to sweeten the pot for purchasers by chipping in money to defray closing costs. FHA currently allows sellers to pay up to 6 percent of the price of the house toward their buyers’ settlement expenses. Fannie Mae and Freddie Mac, by comparison, cap contributions at 3 percent. VA’s ceiling is 4 percent.
Under newly proposed rules, the FHA cap on seller concessions to buyers would drop to the greater of 3 percent of the home price or $6,000. On many home transactions, the reductions would force sellers to lower their prices to enable cash-short buyers to get through the closing. In other cases, sales might simply be too far of a stretch for some purchasers.
The FHA also is restricting the types of “closing costs” that sellers can pay. Six months’ or a year’s worth of interest payments or homeowner association dues in advance no longer will be permitted -— a serious blow to many builders who use these as financial carrots.
Beyond these changes, FHA also plans significant increases in insurance premiums — from 1 percent to 1.75 percent on its upfront premiums, effective April 1, and an increase in its annual premiums by 0.1 percent on all loans less than $625,000 and 0.35 percent on mortgage amounts above that, effective June 1.
These fees will definitely have an adverse affect on home sales to first time home buyers .
While the government is increasing fees on new loans to home buyers, to encourage those home owners that have existing FHA loans who would like to refinance them to lower current rates, the government has announced plans to decrease the upfront fees it normally charges.
The fee reductions will apply only to borrowers seeking to refinance through the agency’s “streamline” program, which is typically less burdensome than a traditional refinancing. There are a few requirements, though the biggest drawback is that only borrowers with loans that were originated on or before May 31, 2009, are eligible. That excludes a lot of borrowers, though the White House estimated that two million to three million mortgage holders would qualify.
In addition, borrowers must have an existing F.H.A. loan that they are seeking to refinance into another F.H.A. loan. They must also be current on their payments, and no more than $500 can be taken as cash out of the loan. But the refinancing does not require any income verification or an appraisal, which means that borrowers who owe more on their mortgage than their house is worth are also eligible.
The F.H.A. charges two types of fees to borrowers, and they have risen in recent years. That has prevented many borrowers from refinancing into loans with some of the lowest interest rates on record, mortgage brokers said.
Now, under the new initiative, the fee known as the upfront mortgage insurance premium will drop to a mere 0.01 percent of the loan balance from 1 percent. Meanwhile, the annual mortgage insurance premium will be cut by about half — to 0.55 percent of the loan balance from 1.15 percent. Taken together, the administration said, the fee reductions could save the typical F.H.A. borrower about $1,000 a year. That does not include any savings from a lower interest rate.
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