By Nick Timiraos writes for the WSJ
Guest Post:
note: Cost increase for FHA loans will start October 4th, 2010. Try to get your home loan before that date!
The costs of getting a mortgage backed by the Federal Housing Administration are about to go up for some home buyers.
FHA-backed loans are wildly popular with first-time buyers for an obvious reason—they require a minimum down payment of 3.5%, far lower than what private lenders offer.
But the loans are quite popular for one other reason—they allow sellers to kick in more cash for closing costs. The FHA currently allow sellers to pay for loan origination, escrow, and other costs for up to 6% of the price of the home.
That could change as soon as next month. The FHA published a notice yesterday that it planned to follow through on moves announced earlier this year to cap those closing cost concessions at 3% of the price of the home.
The FHA’s reasons for doing this are twofold. First, the change will bring the FHA much closer to what the rest of the industry allows. But the other concern was that home sellers have an incentive to sell the home at an inflated price on the front end to recover the money that they’re spending on closing costs on the back end.
Some first-time buyers may not be able to buy a home without the seller assistance. Entry level home builders could be particularly squeezed by the change, says John Burns, an industry consultant based in Irvine, Calif. He estimates that the change could reduce entry level new home sales by 15%.
During the first quarter, around half of all first-time home buyers took out loans insured by the FHA, which doesn’t make loans but instead guarantees to reimburse lenders if the loans default. Around 80% of all home-purchase loans insured by the agency are made to first-time buyers.
The new rule will also require borrowers with credit scores below 580 to make minimum down payments of 10%, and it will set 500 as the minimum credit score. Those changes aren’t expected to have any immediate impact on the availability of FHA-backed loans because most banks have already set their own credit score floors and won’t do loans for borrowers with credit scores below 620.
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