By Sara Huebener
The pendulum continues to swing to the side of over-protectiveness, without regard to the long-term impact on our housing market. Just as we are beginning to see signs of stabilization and recovery, FHA is proposing a series of increases in fees and changes that would impact the housing market. The effective date of these changes has not yet been announced, and more will follow on West Savage Blog as we learn more.
First and foremost, seller contributions to borrowers using FHA financing would be reduced to 3%. While this sounds good from the perspective of a seller, it needs to be understood that this will make obtaining FHA financing more difficult for a buyer. For borrowers who can afford the monthly payment and have the 3.5% required down-payment, but not the additional cash needed for closing costs, this could make the purchase of the property unattainable. On a $300,000 home, this would mean the borrower may need an additional $9,000 in cash (on top of the down-payment) that they did not need to have previously.
Currently sellers can contribute up to 6% towards closing costs for an FHA borrower to make a home purchase more attractive and affordable. This new restriction would prohibit some of that. Fortunately FHA has no plans to touch the existing 3.5% downpayment amount, but we cannot see the rationale in this requirement at a time when we are still working on housing recovery and particularly during the current state of the American economy.
Secondly, FHA is planning to increase the up front Mortgage Insurance Premium (MIP) for FHA borrowers from 1.75% of the loan amount to 2.25%. On a $300,000 home, this is an increase of $1,500 that the borrower would need to have in cash. Finally, the monthly MIP would also increase, but by what amount is yet unknown.
Let me say that we are all for borrowers needing to have some form of downpayment before purchasing a property. People absolutely should need to work for, save for, and have a financial investment in the home they are planning to purchase. The shoddy requirements on credit-worthiness is mainly to blame for what got us into the housing mess in the first place. But changing all the rules of the game during an active time of recovery will be counter-productive.
The past nine months have already seen major changes. We have seen conventional loans jump from 10% required down-payment up to 20% due to declining markets. We have seen major changes in appraisals with the Home Valuation Code of Conduct (HVCC), and the adverse effect it has had on housing sales as a result of non-local appraisers driving into the metro and doing appraisals here. And most recently, we have seen all the changes to the Good Faith Estimate.
We have seen the 90-day waiting period requirement for sellers wanting to "flip" distressed properties that they purchased and fixed up for habitability, thereby eliminating some of the purchases of distressed properties in our marketplace because investors simply could not fix them and hold on to them. (This too was just changed, temporarily.)
Of course, we are also seeing many foreclosure prevention and/or delay programs and loan modification programs in place working in effort to stave off the amount of foreclosures hitting the market. Whether these will end up being good or bad for our market in the long run is yet unknown. And now we have the upcoming changes to FHA - a program touted for its effectiveness in making homeownership attainable for those who have the ability to qualify for a home based on creditworthiness and downpayment, but do not have a tremendous amount of cash at their disposal for non-downpayment related costs.
One thing is clear - our marketplace is ever-changing at the hands of our government officials as they work to over-correct the issues we experienced in 2008 and 2009, and staying on top of it is almost a full-time job. We'll keep you updated on any new changes coming down the pike!