Buy a House Fast

New rules! At least as far as FHA lending rules are concerned.  Long the refuge of borrowers who might not be able to obtain convention financing, the rules have been tightened to increase buyer costs.

First, insurance cost on an FHA–insured loan will increase from 1.75% to 2.25% at the beginning of the loan. Legislation is in progress to shift some of the premium from the initial payment to the annual cost.  The purpose of the increase is to build up capital reserves for the shell-shocked FHA.  The agency that once backed 3% of mortgages now guarantees about 30% of them.  As of December 2009, over a half million of the agency’s 5.8 million loans were delinquent.  Though Congress mandates a 2% cash reserve, the actual reserves currently hover around .5%.

Second, borrowers must now have a credit score of at least 580 by FHA rules if they want to put down the minimum down payment of 3.5%. Those with lower scores must ante up 10%.  In the past, the FHA itself held no minimums, but in reality, banks that processed FHA loans required higher scores.  The new rules are an attempt to assure that new buyers have enough resources to maintain the loan.

Third, buyers who count on a seller contribution to closing costs can only expect help up to 3% of the value of the property, not 6%, the prevailing limit for FHA-backed sales.  This new rules aims to take away this incentive to de-facto inflate appraisal values.

Fourth, now lenders approved to process FHA loans must be more accountable. Bad lending decisions from the past can disqualify lenders as FHA processors.  Bank must also increase reserves.  The language of the announcement is careful to strengthen the FHA’s commitment to “under-served markets” with more limited access to credit.

Although the provision that applied to lenders will go into effect immediately, the other parts of the announcement will not be applicable until late spring – early summer.  In effect, this means that buyers who hope to use the federal housing credit will still be able to negotiate deals with the current standard FHA down payment regardless of their FICO score plus pay the current mortgage insurance fees and seller contributions of up to 6%.  Interest rates are expected to rise by late spring, too.

Looking to buy a house while conditions are right?  Your Express Realty Services’ agent will not only help you find a great DC-area house to buy but can help you earn the home buyer tax credit and beat the clock on new regulations.