The FHA (Federal Housing Administration) made some serious changes that went into effect October 4, 2016. These new rules will affect borrowers by potentially saving them thousands but there are some downsides to the new rules. Borrowers are likely to save thousands of dollars in closing costs but monthly payments may be a little bit higher.
FHA is also setting a minimum FICA score of 500 for homebuyers and borrowers with scores less than 580 will have to put 10% down instead of the traditional 3.5%. If you’re planning on buying a home in the future, an FHA loan is a great option but it might impact your finances dramatically. The FHA agency purchases about 30% of the residential market and it opened its refinancing program to a larger selection of homeowners who owe more on their property than the home is worth. They also considered limiting seller cash contributions on mortgages to 3% of the home price. Previously, it was at 6%.
Here are some of the other changes that may affect your wallet when applying for an FHA loan.
As it sits now, borrowers are required to make a 3.5% down payment in addition to a 2.25% one-time, upfront insurance premium paid upon closing. With the new rules, the down payment stays the same but the one-time fee decreases to just 1%. This can save a lot of money at closing. Consumers who are using FHA insurance can take advantage of these lower upfront costs. Not only can they save money and set it aside for emergencies but they could simply have more to put down on the home rather than to spend that money at closing costs.
The current rate of .55% of the loan balance annually is broken into mortgage insurance will go to .9%. This could add about $50 a month to a mortgage payment for the first year based on the price of the home. This almost makes the lower one-time fee a wash if you have to pay a higher percentage each month anyway. But it will save a little bit at closing.
Other changes include your credit score. In the past, there was no minimum score for FHA loans even though individual lenders set their own standards. But now, under the new rule, FICA scores will need to be at least 500 and borrowers with scores from 500 -579 will be required to put 10% down instead of the usual 3.5%. This could add a huge amount of down payment based on the price of the home.
Another change would affect FHA refinancing. Some underwater borrowers, meaning those that owe more on their house than it is currently worth, were still able to qualify for FHA refinancing loans. But now,” the pool of such borrowers has been expanded with more concrete underwriting requirements and nonmonetary incentives to lenders who participate. This means that homeowners may be eligible with the following requirements:
- Are trading a non-FHA mortgage for an FHA mortgage
- Have a credit score above 499
- Our current on their mortgage
- Can get the lender or investor to write off at least 10% of the old loan
- Our financing no more than 97.75% of the homes value
These new rules can also affect sellers. In the past, sellers could supply up to 6% of the homes selling price in cash for borrowers or buyers for their down payment or closing costs. But now, as of October 4, sellers would be limited to just 3% in cash concessions. If the seller wishes to offer more it would have to come in a reduction on the home price. This could be a benefit to sellers as FHA loans in the past turn some sellers away.
There are a few other details to this FHA mortgage change that may come in the form of eligibility and requirements needed to apply for an FHA loan. For more details or to apply for an FHA loan Contact me anytime.