Effective October 4, 2010 HUD is changing the loan guidelines for their FHA loan program. There’s good news and bad news associated with their changes.

An FHA loan requires a minimal down payment amount. It will remain at 3.5% of the purchase price. The lower down payment makes FHA loans very attractive.

An FHA loan requires the borrower pay for an insurance premium which protects the lender in the event of a loan default. That insurance premium, named Mortgage Insurance Premium (MIP), has an upfront premium and an annual premium. The upfront premium may be included in the loan amount. The annual premium is payable monthly and is added to the monthly loan payment.

GOOD NEWS

The good news . . . the upfront insurance premium is being reduced from 2.25% of the loan amount to 1%. That’s a big reduction! That’s really good news.

BAD NEWS

The bad news . . . the annual premium (which is payable monthly) is being increased from .55% of the loan amount to .90%. That’s a substantial increase. So, it is generally bad news.

EXAMPLE

Yeah, yeah. What does it really mean? Doesn’t it just sort of even out?

Actually, no. The net effect for most people is that it will throw off their required loan ratios just enough so that they might not qualify for an FHA loan. Not good.

Let’s use these assumptions:

~ Purchase Price . . . $300,000
~ Loan Terms . . . . . . Fixed interest rate of 4.5% over 30 years
~ Down payment . . . .3.5% of $300,000, or $10,500
~ Loan Amount . . . . . $289,500 plus the Upfront MIP

Under the “old” guidelines (pre-October 4th), the borrower would pay:

    ~ Upfront MIP at 2.25% = $289,500 x 2.25% = $6,514


    ~ Annual MIP at .55% = $289,500 x.55% = $1,592 divided by 12 = $132.69 per month


    ~ Monthly P&I = $1,499.86


    ~ Total Monthly Payment including per month annual MIP = $1,632.55

Under the “new” guidelines (post-October 4th), the borrower would pay:


~ Upfront MIP at 1% = $289,500 x 1% = $2,895

~ Annual MIP at .90% = $289,500 x.90% = $2,605 divided by 12 = $217.08 per month

~ Monthly P&I = $1,481.52


~ Total Monthly Payment including per month annual MIP = $1,698.60

The monthly difference is $66 higher under the new guidelines. Is that a deal killer?

Unfortunately, in many cases, it is.

ACTION

So, what to do? If you are on the fence about writing an offer, check with your lender to see if the new guidelines will hurt your chances of getting a loan.

If yes, then get going and get that house bought before October 4th!

If no, well, then, resign yourself to the fact that your FHA loan is going to be more expensive.

By the way, the data was provided by Debbie Leviton of Guild Mortgage Company (206-406-1058 | 
DebbieL@guildmortgage.net  |  www.guildmortgage.net/DebbieLeviton).


Thanks Debbie!