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New FHA lending requirements: Affects buyers and sellers alike in Baltimore
David Stevens, the Federal Housing Administration commissioner, announced to reporters last Wednesday (January 20, 2010) that the FHA would be implementing firmer lending requirements and higher borrower fees.
So, what are these new requirements and how will they affect the home buying consumer in Maryland? One of the new requirements is to raise the insurance fees for new home buyers to pay. For the seller of homes currently on the housing market, these new FHA requirements will cap the amount of cash they can contribute for closing costs.
The FHA’s concern with the housing market has made them implement a new policy of 10% down payment for those borrowers with less than credit scores below 580 starting this summer. These new requirements are due to the conditions of the market as well as the FHA being a facilitator of the housing market recovery.
“Yes, this sounds bleak for the consumer but there is still time for the consumer to take advantage of the current fixed rate that is in the high 4s,” said TJ Noye, Precision Funding.
Currently, a potential home buyer can purchase a property selling for $100,000, and the FHA will finance $96,500 leaving the buyer to pay remainder $3,500. Once this new requirements are implemented, a new home buyer with struggling credit would have to pay upfront $10,000.
“If there are potential consumers with not so perfect credit debating on whether to purchase home, his/her wake up call is now. They need to take advantage of the lower down payment because $10,000 is hard for many to pay upfront in the current economy,” said Eric Skeeter, Pillar Property Group.
FHA borrowers with FHA-backed loans must pay an upfront insurance premium, currently set at 1.75% of the total loan amount. This premium rolled into the consumer’s payment. In the spring the premium amount will be raised to 2.25%, this is the second increase in the past two years.
“This insurance premium is necessary to protect the lenders against default on loans that meet FHA criteria. To note, this is refundable in a few years if the house is sold at a prorated amount,” said Noye.
The requirements affect the sellers of many properties by reducing the amount of money that they kick in for closing costs from the current level of 6% to 3%. It has been speculated this new requirement is from the result abuses where the seller marked up the purchase price to be reimbursed for their contribution.
“This would be a good time for many investors to consider real estate for their financial portfolio before these new requirements are implemented,”
There are many options for buyers and sellers to consider. Pillar Property Group would like to outline some of these alternatives:
Options for buyers:
1. If your credit is less than favorable, there are many options to consider such as credit repair services. It would be wise to consult with banking advisors who have worked in the credit industry and have credibility. They can help you achieve your goal of home ownership by analyzing your credit as well as offering solutions such as debt consolidation.
2. There is the lease to own option. This a good option for buyers who are working on their credit while residing in the home they wish to purchase.
3. Take advantage of the current real estate market as it is now. There are less restrictions and entry into homeownership and it is currently ideal. Once these new requirements are implemented, those with less than stellar credit will have a $10,000 upfront cost.
4. Investors need to buy now for two reasons. The first reason is to diversify their financial portfolio for retirement. Also, the pool of buyers will be somewhat smaller meaning there will be more renters from this pool looking for properties to lease or rent.
Options for sellers:
1. Currently, the closing cost level is 6% and the pool of buyers is still available. Remember these buyers are shopping for price and the dream of homeownership. They can recognize marked up prices.
2. You need to be realistic because these new requirements are shrinking the pool of buyers in the housing market. Our advice is to be fair when it comes to pricing of your property.
These are only a few suggestions from us at Pillar Property Group. If you have any questions, please contact us.