Saturday, January 3, 2009

FHA 2009: More Money Out of Pocket

Buying a house in 2009 and thinking about an FHA loan? Be aware your out of pocket investment is going up…

We sure have seen a bunch of changes in the mortgage industry this year. FHA has had a few noted ones, such as raising the loan limit. However, new changes will be in effect beginning in January 2009. And for this area, most important is that more money is required from the borrower.

Effective the first day of the year, any property with a case number for FHA ordered will have the new minimum loan to value requirement of 96.5%. What’s a case number, you may ask? A case number is FHA’s way of identifying a property. When you order an appraisal, you must provide the appraiser with the official assigned case number. The lender obtains this number from FHA’s system. If you’re the borrower, and you switch lenders but still have the contract on the same house, the existing case number and the assignment have to get transferred in FHA’s system.

OK, so back to the cash investment required from a borrower. The old rule was you had to have 3% out of pocket to qualify for an FHA loan. And you could finance up to 97.75% of the loan. You could use the other .75% required left over toward your closing costs. Now, you have to put a down payment equal to 3.5%. To make it a little clearer, if you were buying an home via FHA in 2008 that cost $100,000, you could finance up to $97,750, and only pay $750 in closing costs if the seller were will to pay the rest. Now, you have to put $3500 down for a loan amount of $96,500, and you and the seller have to negotiate the rest of the closing costs. Closing costs now cannot be used to meet the 3.5% requirement.

If you think about it, this change will afford FHA a few things. Number one FHA now has more wiggle room to recoup some loss in the event of foreclosure. More money down means more equity. The other aspect is that a borrower now has to a bit more serious about saving for a home if they need FHA financing.

But what hasn’t changed is that the seller can still contribute 6% of the sales pricing to help out with closing costs. That’s more generous than most lending programs with the exception of a few. And your down payment can still be in the form of a gift from a qualifying donor (blood relative is always a safe bet). Thus, these nuances of the FHA loan that have been so beneficial to many aren’t going away.

The FHA program has always been a strong one because its foundations were based upon common sense lending. Income was always verified, assets were always checked out, and the program is only for primary residences. I think these new changes may make folks have to wait a bit longer before buying a house, but it’s a smart move to keep FHA lending healthy and out of the headlines. We’ve had enough mortgage headaches due to bad decisions by lending institutions and borrowers. These changes make sense, and that’s ok with me.

Let My Experience Work For You!
Email your home loan financing questions to Kristin Abouelata, Home Loan Specialist with Mortgage Investors Group, at or call direct: (865) 567-0113 Toll Free: 1-800-489-8910.

For more information visit her website at Home Loans Plain Talk.


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