FHA backed mortgages which have increased dramatically in the Sacramento area during the past few years and have allowed many first time buyers get into a home will be harder to obtain.  The changes announced this week by the Federal Housing Administration also included a provision which may accelerate the recovery of the Sacramento real estate market.

The FHA makes it possible for buyers to get a mortgage with a down payment of just 3.50 percent compared to the standard 20 percent for a conventional loan.  This is done in exchange for paying for mortgage insurance.  With all the changes in mortgage lending, including the decline of the sub-prime market, FHA financing has been increasingly used by homebuyers over the past five years.  Unfortunately with increased volume the level of defaults has also increased which is  causing issues for the FHA and pressure from Congress to make changes.

New Guidelines

The new guidelines for FHA backed mortgages require higher insurance premiums, better credit scores and a reduction in seller concessions (sellers paying buyer costs). The down payment rate of 3.5 percent remains intact for buyers with good credit.

New applicants for FHA loans must have a minimum credit score of 580 to obtain a 3.5 percent down payment.  This really means no change to the current program because it is almost impossible for a buyer to get any loan if their credit score is below 580.  If someone with a credit score below 580 can even find a lender to entertain a mortgage the down payment requirement will be 10 percent.

Mortgage insurance costs under the new guidelines have been increased from 1.75 to 2.25 percent of the loan.  These premiums can be paid over the life of the loan.  For a $100,000 loan this is an increase of $500 over the life of a 30-year loan and should not represent a serious issue for most buyers.

The change on how much a seller can pay buyer closing costs are now a maximum of 3 percent which is a reduction from 6 percent.  Again this is not much of a change as you might think.  The norm and what most banks will approve is a 3 percent seller concession.

Other Changes

If you have been looking to buy a home and have been told certain homes are not eligible for FHA financing it most likely is caused because FHA does not allow loans on purchases of homes owned less than 90-days by the seller.  This has made it difficult for investors who are buying properties, doing some rehab work and selling them for a profit.  As of February 1 the FHA will start a one year moratorium on this rule.

This is a very positive change for our Sacramento market and will encourage more investors to buy some or our excess inventory and homes in disrepair.  Flippers don’t have the best image but this is an important element of a recovering housing market for Sacramento.  We have way too many homes that are in such a state of disrepair that they are not eligible for any financing.  Although some buyers are capable of making repairs, most are not.  With the FHA moratorium on the 90 day rule we should see these damaged homes repaired and available to buyers.

There are some restrictions to avoid fraud and abuse including the sale must be “arms length” and the sales price cannot be more than 20 percent more than the original purchase price unless the improvements are justified by an appraiser.

Summary

Overall the changes made by the FHA in regards to obtaining an FHA mortgage are not significant and they are much less severe than have been rumored.  Most buyers will still get a loan with a 3.5 percent down payment but it will cost slightly more than before.  The changes that encourage investors to buy, fix and sell homes are very positive and are coming in time to make a difference for buyers who will qualify for the federal tax credit program.

If you or someone you or someone you know is considering buying or selling a home and have questions about how the changes in FHA loans may impact you, please let me know.  You can contact me at MagnumOne Realty in Roseville at (916) 290-9339 or by email to JulieJ@Jalone.com.