Congress moved to raise the loan limit for mortgages backed by the Federal Housing Administration recently, despite some lawmakers' fears of artificially propping up the market.
The bill increased the ceiling on the loans to $729,750, up from $625,500 in October. The loan limit had been raised to this level before in an attempt to promote homeownership during the height of the recession, but it was allowed to expire.
With as little as 3.5 percent down payment required to close on an FHA loan, the program has long been promoted as an option for first-time homebuyers. But critics have claimed that the higher loan limit exceeds the needs of most first-time buyers and places too much pressure on the federal government to subsidize housing.
On the other hand, proponents of raising the limit argue that historically expensive markets require the FHA to raise their ceiling to be useful to buyers. Around 600 counties were affected by the FHA loan limit drop in October.
The bill was not without compromise, however. Proponents in the House and Senate had to shed a similar limit raise on loans held by government-sponsored mortgage giants Fannie Mae and Freddie Mac. The limit placed on the two major mortgage finance companies remains at $625,500.
The news comes after an audit of the FHA revealed that there is nearly a 50 percent chance that the administration will require a federal bailout next year if the market worsens. The administration is down to $2.6 billion in cash reserves, down from $4.7 billion last year, according to the New York Times.
FHA Loans: Waiting Will Cost You Big Time
The FHA is making proposals to change mortgage insurance premiums, FICO (credit score) and down payment combinations and seller concessions. The changes will be posted in the Federal Register next month and after a comment period would become effective early summer.
With these rule changes, an FHA loan could cost you 10% more to close. That's $25,000 on a $250,000 loan.
3.5% Down Payments and seller concessions of up to 6% will soon be a thing of the past for many. Mortgage insurance premiums will also increase by 1/2 point.
Here is a quick summary of the changes:
- Increase upfront Mortgage Insurance Premium (MIP) to 2.25% – up 0.5%
- Decrease seller concessions from a maximum of 6% to a maximum of 3%
- Change FICO score/down payment combinations to as low as a 3.5% for a FICO Score above 580 and up to 10% for a FICO Score below 580.
So, with a FICO score below 580, the amount of out-of-pocket money to close an FHA loan would increase by about $25,000 on a $250,000 mortgage ($1,250 MIP, $7,500 increase in seller’s concession, $16,250 increase in down payment). This would be added to the current total cost, an increase of 10%. A FICO score above 580 could still add about $8,750 or 3.5%.
The FHA is taking these actions to reduce troubled mortgages in the future. They will also be making changes to reduce fraud.
These actions will allow them to add to their reserves against bad loans. As a home buyer, these changes will increase your overall costs to borrow tremendously.
Stay tuned, we'll keep you updated on these FHA Loan changes as they become effective.
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