FHA Changes Terms and Conditions
for Buyers After April Fool’s Day
April Fool’s Day has added significance for homebuyers using FHA financing. There are a number of changes that take effect on 4/1/2012. Buyers would be foolish not to enter into contract in March and get to their lender (preferably Jay Ralstin at Hancock Bank) quickly to have FHA case numbers ordered prior to this date. The most significant change is the increase in the mortgage insurance premiums (MIP). It’s important to know that you don’t have to close the transaction by a certain date, but you do need to be under contract and made full loan application with an FHA lender prior to April 1st so that they can establish a case number with FHA prior to the April 1, 2012. This will allow the current rules will apply rather than the revisions below.
Here are some of the changes:
MIP increases – Up front MIP is increasing from 1% currently to 1.75% (this can still be financed).
Annual MIP (monthly portion) is increasing .1% per year. (e.g. for a 30 year, 96.5% loan to value loan the annual MIP will be increasing from 1.15% to 1.25%) For a $200,000 base loan amount, these two changes will cost the borrower an added $23.61 per month.
Other changes include:
Self Employed Borrowers - P&L and Balance Sheets will be required
Disputed accounts or Collections/Judgments:
- If a borrower has singular or cumulative disputed accounts and/or collections that are >$1,000, the accounts MUST be resolved.
- Resolved = paid in full OR payment arrangements with a minimum of 3 months verified on time payments. Payment arrangements must be included in the borrowers ratios. Must provide documentation showing the payment arrangements have been set up with the creditor and paid on time such as bank statements or cancelled checks.
- If the borrower has accounts >$1,000 as a result of Identity Theft, they must provide a copy of the police report and other satisfactory documentation supporting the identity theft and then these accounts will not need to be paid or counted in their ratios.
- Judgments need to be paid in full UNLESS the borrower has set up satisfactory payment agreements with the creditor and has paid a minimum of 3 on time payments
- The borrower CANNOT pay down collections/judgments or disputed accounts to under $1,000 to avoid having to pay them off or make payment arrangements
Identity of Interest - Added definition of a family member now includes: step children, step siblings, aunt uncle, step grandparents.
Why is FHA making these changes? Due to the limited financing options requiring low down payments, FHA has been the program of choice for over 30% of the homebuyers financing their homes. This is a dramatic increase over the past when FHA was used for less than 10% of the transactions but has steadily increased its market share in the past 4 years. It’s been so popular that the fund that insures against defaulting loans has been depleted to a point that the agency needed to increase the cost of utilizing FHA financing.
Even at the higher cost, FHA continues to be a great alternative for borrowers needing to put as little as 3.5% down. Additionally FHA loans are assumable and this benefit is going to be huge in a few years when it’s time for you to sell that home. A buyer can assume an interest rate less than 4% when market rates could be significantly more. That low down payment that you initially enjoyed also means that buyers of the same house in 6-7 years will not need an extremely large down payment in order to buy out your equity. This opens the market of prospective purchasers that will make selling your home in the future that much easier.