There has been a lot of talk going around on the upcoming changes to FHA lending. The Federal Housing Administration is proposing raising the down payment requirement to 5% from 3.5%, lowering seller concessions from 6% to 3%, and raising the minimum credit score. They are also proposing raising the upfront mortgage insurance premium that is charged to buyers and financed into the loan amount. This has caused quite a panic in the real estate industry. Changes to the FHA Program will be painful but necessary.
My concern is more with the lowering of the allowable seller concessions from 6% to 3%. Seller concessions are the closing expenses that the seller agrees to pay on behalf of the buyer. Most of the first time homebuyers that I work with are purchasing homes in the low $100s or under $100,000. Typical closing costs at this price point in Florida run between $5,000 – $6,000. This is taking into account that my fees are minimal, most mortgage companies charge higher fees than my company, which makes the closing costs even higher. Title company fees seem to be higher than ever now and as always Florida has various taxes that are charged on real estate transactions. Survey fees, appraisal fees, and homeowner’s insurance premiums are all on the rise. These fees are all factored into the estimate. 90% of the loans that I close have the seller paying all or most of the buyer’s closing costs.
Let’s look at an example… Let’s say my buyer is buying a home for $110,000. Their closing costs are $5500. Under the current FHA guidelines the seller can pay up to 6% of the sales price towards my buyer’s closing costs, so they can pay up to $6600. If my buyer only has the 3.5% down payment and the seller agrees to pay all his closing costs, then my buyer can get into the house with just $3,850 out of pocket. Let’s look at the same buyer under the proposed changes. My buyer now has to put 5% down, so instead of $3,850 in down payment, they will need $5,500. This is only $1,650 more than before, so although it is a strain, they may be able to come up with the difference. However, we need to then factor in that the seller is now only allowed to pay 3% of the sales price towards closing. The seller can now only pay $3,300 of the buyer’s $5,500 closing costs. The buyer now has to put $5,500 down and pay the $2,200 difference in closing costs, they need a total of $7,700 to close on the house instead of the $3,850 needed before the guideline change. The 3% cap on seller paid closing costs is going to affect the ability of the average first time homebuyer to purchase a home.
I agree with the 5% down payment, it is necessary for the Federal Housing Administration to be able to continue to insure the amount of loans that they are now taking on. I sincerely hope they reconsider the change to the seller concessions.