FHA loan rules to get tougher
WASHINGTON — The Federal Housing Administration plans to impose significant restrictions on the amount of money sellers can contribute at settlements. FHA also will be raising its mortgage insurance premiums during the coming weeks, increasing charges for new purchasers across the board.
Over the past six years, FHA has been the turnaround champ of residential real estate, offering down payments as low as 3.5 percent despite the recession and housing bust and expanding its market share from 3 percent to more than 25 percent. The program is a crucial resource for first-time buyers and moderate-income families, especially minorities.
But during the same span of rapid growth, FHA's insurance fund capital reserves have steadily deteriorated — far below congressionally mandated levels. Delinquencies have been increasing. According to the latest quarterly survey by the Mortgage Bankers Association, FHA delinquencies rose to 12.4 percent compared with a 4.1 percent average for prime (Fannie Mae-Freddie Mac) conventional fixed-rate mortgages and 6.6 percent for Veterans Administration loans.
As a result, FHA is under the gun — from Congress and from within the Obama administration — to get its own house in order, cut insurance claims and rebuild its reserves. The upcoming squeezes on seller contributions and bumps in premiums are steps in this direction, but may not be the last.
Traditionally FHA has been unusually generous in allowing home sellers — including builders marketing new construction — to sweeten the pot for purchasers by chipping in money to defray closing costs. FHA now allows sellers to pay up to 6 percent of the price of the house toward their buyers' settlement expenses. Fannie Mae and Freddie Mac, by comparison, cap contributions at 3 percent. VA's ceiling is 4 percent.
Under newly proposed rules, the FHA cap would drop to the greater of 3 percent of the home price or $6,000. In sales involving houses priced at $100,000 or below, this wouldn't change anything ($6,000 equals 6 percent of $100,000). But on all sales above this threshold, the squeeze would get progressively tighter. FHA also is restricting the types of "closing costs" that sellers can pay. Six months' or a year's worth of interest payments or homeowner association dues in advance no longer will be permitted — a serious blow to builders who use these as financial carrots.
Beyond these changes, FHA also plans significant increases in insurance premiums — from 1 percent to 1.75 percent on its upfront premiums, effective April 1, and annual premiums by 0.1 percent on all loans under $625,000 and 0.35 percent on mortgage amounts above that, effective June 1.
Bottom line: Nail down your FHA money and seller-contribution negotiations as soon as you can.
Kenneth R. Harney can be reached at [email protected]