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FHA Loans Just Became More Expensive

The FHA, one of the country’s leading mortgage insurers has announced that it will be increasing fees, down payments, and restricting the amount a buyer can expect contributed by the seller at closing.

What this means for the average buyer is that obtaining an FHA loan may be both more difficult and more expensive. Over 30% of home loan borrowers use FHA loans because they have always offered the lowest down payment (3.5%), allowed the buyer to use “gifted” money as a down payment, and allowed sellers to contribute up to 6% towards closing costs. These measures greatly reduced the total amount of money a buyer would need to purchase a home, making an FHA loan ideal, especially for first time home buyers.

All of this expected to change by early summer 2010. Borrowers with credit scores less than 580 will need to come up with a minimum of 10% of the purchase price to put down. And all borrowers can expect a 3% maximum seller contribution of closing costs.

Also set to increase by spring 2010 are the upfront fees for FHA insurance. When FHA loans go into default, FHA reimburses the bank for the loan, because of this FHA charges an “insurance premium” on all loans. The upfront fee or what the buyer would pay at the closing table will go up from 1.75% currently to 2.25% in the spring. On a $100,000 loan that’s a difference of $500.00, but this fee can still be rolled into the loan and does not need to be paid in cash.

FHA will ask Congress to also raise the annual premiums. Annual Premiums are generally broken down into monthly payments and paid with the mortgage note each month. They are currently .55% for loans with less than 5% down and .50% for homes with more than 5% down. On a 100k home that equals about $45 and $41 per month respectively. What FHA would like to do is reduce the upfront premium by .25% and tack this amount on to the annual premium.

On the bright side, FHA has temporarily lifted the restrictions for buying a home that the seller has owned for less than 90 days. This measure should help to create new options at better prices for FHA borrowers, as they will now be eligible for certian bank owned homes.

Here is a simple breakdown of the changes:

  • 3% limit on seller contributions
  • 10% down payment for borrowers with less than 580 FICO score
  • FHA Insurance “Up Front Fee” will increase to 2.25% (Of money borowed) but can be
    rolled into loan
  • Possible increase in FHA insurance  “annual fee” (Broken down and paid monthly)
  • One Year Temporary Waiver, for 90 day “flipping” rule
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