Are you debating whether to finance your new home purchase or refinance your current mortgage with a conventional loan of a FHA loan? Before deciding, there have been some changes with the FHA loan program. On September 15, 2015, the Federal Housing Administration changed some of the FHA mortgage loan requirements regarding its single family home loan program.
What makes the FHA program so attractive? FHA loans are no-nonsense financial products that everyone can understand. They are available with low down payments — as low as 3.5% — a huge advantage for borrowers who want to buy today rather than wait years to save up the 20% down payment preferred by many lenders. The reason for the low down payment is that the FHA does not actually lend money to borrowers. Instead, it’s an insurance program. The borrower pays premiums, the insurance covers potential lender losses, and with a strong third-party guarantee in place, lenders are willing to make loans with little down. The FHA program is always in motion — so it’s no surprise that for 2015, FHA loans will be different. Some of the changes will be good news for borrowers, but others won’t be so positive. The following items are a few of the differences between the old rules and the new rules for borrowers.
MINIMAL CREDIT SCORES
FHA is setting a minimum FICO score of 500 for homebuyers. And borrowers with scores of less than 580 will have to put 10 percent down, instead of 3.5 percent.
UPFRONT MORTGAGE INSURANCE PREMIUM (DECREASE)
Old rules: Borrowers were required to make a 3.5 percent down payment, plus a 2.25 percent one-time, upfront insurance premium paid at closing. On a typical $177,000 house (roughly the U.S. median, according to the National Association of Realtors), that equaled $10,178.
New rules: The down payment stays the same, but the one-time fee decreases to 1 percent. So for the same home, you pay $7,965.
ANNUAL MORTGAGE INSURANCE PREMIUMS (INCREASE)
Old rules: The rate was 0.55 percent of the loan balance annually. For a $177,000 home with 3.5 percent down and a $170,805 mortgage, that amounted to $78 per month for the first year. (The fee, which is based on the loan balance, decreases annually.)
New rules: The rate goes to 0.9 percent. With that $170,805 mortgage, it will cost $128 per month the first year.
Old rules: Sellers could kick in up to 6 percent of the home’s selling price in cash.
Proposed rules: Sellers would be limited to 3 percent in cash concessions. Anything more would have to come in the form of a price reduction on the house.
Old rules: Some underwater borrowers were able to qualify for FHA refinancing loans.
New rules: The pool of such borrowers has been expanded with more concrete underwriting requirements and non-monetary incentives to lenders who participate.
Under new rules, potential borrowers will likely save thousands at closing. But those monthly mortgage payments will be a little higher. A buyer should be well informed and knowledgeable of all of the choices available when borrowing the funds for the largest purchase in their lifetime. Allow us to help you determine the value of your home so you can make an informed decision on what program works best for you. We have experienced appraisers in Harford County, Baltimore County, Baltimore City, Howard County, Anne Arundel County, Cecil County and Carroll County, we would appreciate the opportunity to help you achieve financial success.