Since we seem to be in a first-time buyer market, with time remaining to take advantage of the $8,000 tax credit, this seems like a good idea to make sure you understand the Federal Housing Administration’s new requirements for securing FHA loans. In effect since January of this year, they are still essentially “new.”
First, let’s be clear that an FHA loan is not actually money borrowed from the government. Your FHA loan is really a loan insured by the federal government in case you default.
Anyway, if you are trying to buy a home, and do not have the hefty down payment a conventional loan will require, FHA will be your best option. However, there are some criteria that must be met, and they have recently changed and are more stringent than a year ago. Here’s what you need to know:
- You must have a minimum of 3.5% of the purchase price for a down payment. (If your credit score falls to 580, FHA will require 10%)
- Permissable seller contributions (for instance, closing costs), fall from 6% to 3%.
- Upfront mortgage insurance premium will increase from 1.75% of the loan amount to 2.25%. That means on a $100,000 loan the cost will go from $1750 to $2250. This is the insurance that protects the lender, not you.
So in a $100,000 purchase scenario, a buyer would need $3,500 for a down payment. If the sellers agree to pay the 3% towards closing costs, the buyer will probably still need another 1% or more to cover all costs. While the FHA says over 580 to qualify for the 3.5% down payment option, some lenders I work with are looking at 620 for a low score before they will take any risk. If you are considering a home, first-time or otherwise, and FHA is your best option, make sure you are clear on what your preferred lender will require. If you don’t have someone you trust, I do. If you would like some lender recommendations, email me or give me a call, and I will be glad to share some names of people that have years of experience and are good at what they do. But don’t wait. You still need to be under contract by April 30, 2010 to qualify for the tax credit.
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