Deanna Valeo

More FHA Rules Changes - amount of seller paid closing costs changes and more

"I never think of the future - it comes soon enough. Albert Einstein

FHA financing rules will make loans harder to get and require more upfront cash; here are a few of the changes headed our way.


Sellers will no longer be able to pay up to 6 percent of the buyer's closing costs to help purchase the home. New rules will roll back seller's contributions to 3 percent maximum, similar to Fannie Mae or Freddie Mac conventional financing guidelines.

For example, on a $100,000home loan, sellers can currently contribute up to $6,000 (6 percent) toward buyers' closing costs, reserves and repairs, as long as the buyers have 3.5 percent of their own funds for the down payment.

Under new rules, only $3,000 (3 percent) would be allowed, requiring a buyer to have more upfront cash at closing. This change reduces the lender's risk that seller concessions could artificially inflate property values, and FHA would start out by insuring a home already under water.

CHANGE 2: MORTGAGE INSURANCE PREMIUMS – (these changes are in place now)

Mortgage insurance is a capital reserve fund that protects lenders if the buyer defaults. Buyers pay into this reserve with an up-front fee at closing and in each monthly mortgage payment. With our recent foreclosure crisis, this reserve has been strained. Effective beginning this month, FHA can make the following fee changes:

• Reduce the upfront fee from 2.25 percent to 1 percent of the loan amount. At first glance this reduction would seem a beneficial step. However, you will notice this change in the monthly payments.

• For loans with 5 percent to 20 percent down, the annual mortgage insurance premium increases from 0.5 percent to 0.85 percent. For loans with less than 5 percent down, the premium increases from 0.55 percent to 0.9 percent.

For the average buyer, this charge will continue as part of the monthly mortgage payment until the loan-to-value reaches 78 percent and mortgage payments have been made for at least five years.

CHANGE 3: CREDIT SCORES (our last day to lock at 620 score is Nov 15th for now)

FHA's lenient rules previously let buyers with low credit scores qualify for a home loan without an overt penalty. Now FHA will mirror other conventional financing. FHA will increase the interest rate for buyers with low credit scores. Additionally the major banks have added overlays requiring a minimum 640 FICO score (some will require a 660 FICO score)

Additionally, your credit score will not only affect your interest rate, but it could increase the amount of the down payment required by your lender up to 10 percent. On a $200,000 loan, the minimum 3.5 percent down payment of $7,000 would increase to $20,000.

CHANGE 3: CONDOMINIUM APPROVALS (some grandfathered condo projects will expire this December)

A national requirement for more intensive reviews of individual condo projects is under way and could hold up your purchase if an association is not proactive before new requirements are put in place. FHA Condo approvals can take up to 6-weeks after approval of all the necessary documents. These must be submitted by an approved lender to the FHA HOC – they will then issue an approval. If the condo community does not have approval no FHA loan can be used.

A couple of the must-have criteria include that at least 70 percent of the units be owner-occupied and less than 15 percent of the units in foreclosure. Without financing approval for a condo project, the only real sale possible is with seller- financing or cash.


So those are just a few of the risks of inaction. Once the real estate market bottoms out, look for interest rates to start rising. Because most people focus on what their monthly payment is, you will find yourself purchasing fewer homes to keep the same monthly payment. For every 1 percent increase in interest rates, you lose 10 percent in borrowing power.

So in essence the longer you wait, the less you will be able to borrow if you want to keep the same monthly payment.

The times when virtually anyone could obtain a home loan are gone. As these and other FHA changes take effect, your ability to obtain a home loan could get even more difficult in the future.

@ The Valeo-Croy Team, we are here for you.

The Valeo-Croy Team -  (704) 366-7711

Todd Croy - NMLO license #91428
Deanna Valeo - NMLO license #91421

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The Valeo-Croy Team and Cunningham and Company Mortgage Bankers are Equal Housing Lenders.This information is for illustration only. It does not constitute an application for a loan or an offer or commitment for Cunningham and Company to make a loan on these terms. Interest rates are subject to change until an application is completed and you lock in your interest rate. The figures noted are estimates and may vary depending on discount points, taxes and insurance. Programs, terms and conditions are subject to change without notice. Mortgage loans are subject to credit qualifications. Normal credit standards apply.   Date: 11/01/2010

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