In 2010, the Federal Housing Administration restructured the mortgage insurance and lending guidelines surrounding mortgage loans insured by the agency. These changes included minimum credit score requirements for low down payment loans, new up-front and annual mortgage insurance premiums, and a change in the net worth requirements for lenders offering FHA loans. One element that was noticeably absent was a change in the amount a seller can pay toward buyer closing costs. It looks like the day of reckoning is coming.
The FHA had announced in 2010 its intention to decrease allowable seller contributions on insured loans from the current 6% down to 3% in order to bring the loan program in line with conventional loan guidelines. Seller contributions allow buyers to contribute less to a transaction, and enable many first-time and low to moderate income borrowers to buy a home. Thus, this policy is essential to maintaining the recovery in the fragile housing market. As an example, a buyer considering a $150,000 home purchase might have to absorb between $5,000 and $7,500 in closing costs in addition to the FHA’s minimum required 3.5% down payment. Currently the seller could pitch in for all of those closing costs from their sale proceeds but, under the proposal, they would be limited to $4,500.
Real estate agents, builders, and mortgage lenders have voiced concern over this new policy on the heels of other changes to government housing policies. Now, it looks as though the FHA is starting to cave, at least a little bit, in this fight. It appears the agency is going to allow some higher seller-paid closing costs, perhaps 4-5% on smaller loans to allow low-to-moderate income buyers the ability to purchase a home. At the same time, they would limit contributions for higher loan amounts to the previously proposed 3%.
This should salvage most transactions as 6% contributions on higher dollar mortgages are less common than for lower-priced homes. This will, however, hurt some entry leveler buyers in areas that have a higher entry price point, but are not considered by HUD to be a high cost market with higher loan limits.
Ultimately, this proposal is another attempt to unravel the Federal government’s support of the housing market. The FHA will continue to play a vital role as government agencies Fannie Mae and Freddie Mac are phased out in some manner, leaving the private markets in charge of most mortgage lending. Until then, it behooves many home buyers with low down payment resources to buy now or they may be forever holding their peace.
