How the Recently Announced FHA Loan Changes will Effect Orange County Homebuyers

HUD issued a press release last week announcing 3 changes to the FHA program which will effect Orange County homebuyers using FHA financing to purchase a home. There had much much anticipation and apprehension about possible changes to the FHA program, so this is not unexpected. And when you get down to it, the changes will have minimal effect, at least how high cost areas such as Orange County and Los Angeles County.

What are the Three FHA Program Changes that will Effect Orange County Home Buyers?

FHA announced they will increase the minimum down payment requirement for FICO scores less than 580 to 10% down. Currently FHA does not have a minimum FICO score and allows a down payment to be only 3.5% of the sales price. This change will have little effect since most lenders have a minimum FICO score of 620 or higher. Bottom line is, this change will have no effect on Orange County home buyers.
FHA announced they will decrease the allowable seller contribution for closing costs from 6% of the sales price to 3% of the sales price. This will also have very little negative effect on high priced counties such as Orange County and Los Angeles. Under the current guidelines, if an Orange County first time home buyer was to purchase a home in Santa Ana for $400,000, they could negotiate to have the seller pay $24,000 in closing costs. But there is little chance they could actually get the seller to accept an offer like that, on top of the fact that closing costs would not be nearly that high unless the interest rate was being “bought down” to a lower than market rate. Under the new guideline allowing 3%, the seller could pay $12,000 ($400,000 x 3% = $12,000) towards the buyers recurring and nonrecurring closing costs. That amount should be more than enough to cover the closing costs on a typical home purchase. Bottom line, the change to 3% will have very little effect on Orange County first time home buyers.
FHA announced in Mortgagee Letter 2010-02 that the Up Front Mortgage Insurance Premium (MIP) will increase to 2.25% from the current 1.75% on a purchase and 1.5% on an FHA Streamline Refinance. The change will take effect on April 5, 2010. The MIP is financed into the loan, meaning FHA borrowers do not need to come out of pocket for it anyway. Under current guidelines, a $350,000 base FHA loan would have a MIP of $6,125 ($350,000 x 1.75% = $6,125), resulting on a total FHA loan amount of $356,125. Assuming an interest rate of 5.5%, the principal and interest payment would be $2,022. After April 5, using a factor of 2.25%, the MIP would be $7,875, resulting in a total FHA loan of $357,875. Assuming the same interest rate of 5.5%, the principal and interest payment would be $2,031. The payment difference would be only $9 per month, which will have almost no effect on the typical Orange County first time home buyers ability to purchase a home with FHA financing.

FHA does have aggressive cash out refinance guidelines, especially for “high balance” loans over $417,000. Orange County homeowners thinking of taking advantage of FHA financing for a cash out refinance (which includes combining a 1st and 2nd or Equity Line of Credit) should act quickly to avoid the MIP increase. **Of course, Orange County borrowers considering a cashout refinance who are eligible for a VA loan should definitely check out the benefits of a VA loan. With the high limits that VA now offers, and the fact that there is no Monthly Mortgage Insurance, a VA loan is a great way to go.**

Are More Changes Coming?

While these changes were expected, there are still more potential changes coming. There is a push to increase the Monthly Mortgage Insurance (MMI), which is currently based on .55% of the base loan amount for 30 year fixed loans over 95% loan to value, which is what most first time home buyers go with. An increase in the MMI would have an effect on qualifying. Currently, assuming a loan amount of $300,000, the MMI would be $137 per month. An increase of even just .25% to the MMI would increase the payment on a $300,000 loan amount by $62 per month. A change to the MMI may or may not happen, but why wait to find out. First time home buyers in Orange County should act now to avoid any extra costs that are related to upcoming, proposed, and rumored changes to the FHA loan program. FHA recently announced that the 90 day No Flipping rule would be waived effective February 1, 2010. This will help increase home inventory available for those using FHA financing to purchase a home. Along with low mortgage interest rates in Orange County, low home prices, and the First Time Home Buyer $8,000 Tax Credit, there has not been a better time to purchase a home in Orange County for a long time.

Authored by Tim Storm, an Orange County, CA Loan Officer – Please contact my office at Trust One Mortgage for more information about an Orange County, CA home loan. 877-786-4243 x 7.

www.OCFHALoans.com