Proposed changes in FHA loan rules will increase downpayment amounts and loan fees, and decrease closing cost allowances.

H.R. 3706, the so-called FHA Taxpayer Protection Act of 2009, is expected to raise the minimum downpayment amount for FHA homebuyers from 3.5% to 5% and reduce the amount of closing costs that can be financed into the mortgage. Although the bill as written completely eliminates the option to finance closing costs, it is expected to be modified before final approval to allow up to 3% in closing costs to be financed. Currently FHA homebuyers can finance up to 6% of the purchase price in closing costs, which typically include initial loan service charges, appraisal fees, title and escrow fees, and prorations of property taxes and HOA dues. 

Expected changes to FHA lending rules also include higher minimum FICO scores and higher up-front FHA mortgage insurance premiums. With higher downpayments and higher up-front mortgage insurance premiums, that would be a double-whammy to potential homebuyers who don’t have the cash reserves to cover these additional costs.

First-time homebuyers will be the hardest hit by these changes, since about 80% of FHA loans are issued to first-time homebuyers. Ethnic groups will also be hard-hit, with reports that 50% of Hispanic homebuyers and 60% of black homebuyers used financing insured or guaranteed by either the FHA or the VA this year.

The National Association of Realtors (NAR) strongly opposes H.R. 3706, stating that it “would not add anything to FHA reserves but would put homeownership out of reach for many creditworthy borrowers”.

Fact is, cash-poor does not always mean credit-poor, as many FHA buyers have high FICO scores combined with low cash reserves. The requirement for an additional 1.5% downpayment may put homebuying out of reach for many of these borrowers. Closing costs are also an important factor, although the reduction 6% to 3% should still be manageable for many homebuyers. In fact, in the case of bank-owned (REO) homes and short sales, closing costs in excess of 3% are often not approved even now.

Santa Clarita Realtor Linda Slocum is a Certified Distressed Property Expert (CDPE) and Certified Residential Specialist (CRS) specializing in Santa Clarita residential real estate, foreclosures and short sales. You can reach her at 661.670.0349 or at Linda@SantaClaritaRealEstateBlog.com. To search for Santa Clarita homes, use our neighborhood search tools or visit HoneyStartPacking.com.

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