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FHA Diet Plan: More Fruits & Vegetables, Less Fast Food, & More Cardio

December 10, 2009 by  
Filed under Featured, Finance, National

large-blueberryWe’re a little late posting on this topic which seems to have been beat in the head since everyone caught wind of it, but we’re not sure that this “bad news” is really all that bad at all.  It might also be fair to say that it’s not all that interesting either.  We’d rather spend the time available to post an update on ENSO (coming soon).  But, there were some questions we bounced back and forth between a couple of the lenders we regularly refer business to (btw, a good reliable lender can sometimes be like a pint of your favorite ice cream) and we had to get our facts straight.

Awesome Lenders: Lori Richmond & Virginia Lawson

If you have yet to be filled in, the government backed loan program (FHA), has become a resourceful option for first-time buyers, but the program is moving towards congressional tightening on standards with FHA applicants during an economic upswing–or even better known as a plateau.  There’s certainly no doubt that the peak of the market during 2006/07 won’t be coming back anytime soon, but why ruin the party when people are finally starting to show up?

In a quick pre-summary, FHA is looking to make three major changes that could hinder the market’s momentum: increasing FICO score requirements, decreasing the allowable percentage of contributions a seller can provide to meet lending guidelines, and increasing the down payment minimum from 3.5% to a whopping 5%.

A lot of what’s attracting the attention to these changes is that standards will become tighter for mainly first-time buyers, yet FHA loans have become a popular and inexpensive option for those who are having a hard time coming up with a 20% down payment for a conventional loan. Although conventional loans will allow borrowers to go down to 5%, they require a buyer to pay for additional fees such at private mortgage insurance (PMI), as well as have a credit score of at least 740.  That’s just for single-family homes.  Condos are another story. Condos require a minimum of a 10% down payment in order to obtain PMI on a conventional loan.  Therefore, FHA is the only option for buyers that cannot even come up with that initial 10% on a condominium.

Also, a seller can currently contribute to a buyer’s purchase through concessions of up to 6%, and many feel that bringing the newly proposed maximum to 3% will be more in line with common norms.  However, what most industry professionals are most concerned about is the additional FICO score increase, which hasn’t had any positive influence with a lot of Americans over the last couple years.  The requirement had already been raised recently, and FHA is looking at increasing the minimum down payment amount which could put a lot of potential buyers out of the game.

With the proposal of a new bill, the new guidelines would also raise minimum down payment to 5% as opposed to the current 3.5%.  It’s important that the program survives and many feel that raising FHA standards could be detrimental.  At the same time, the tax credit has certainly pulled a lot of first-time buyers over the fence, and now it’s time for those who sold to continue the stimulation by moving up.  Regardless, if FHA doesn’t survive as a viable option for buyers that need help with getting their foot in the door, then there’s not really any other options out there at this time.  The next generation of  buyers are going to need to pull together more resources and put in a little more effort up front.

That said, it’s really not all that bad of news, compared to real estate-related headlines we’ve gotten used to.  In fact, the spin would be that the market has been stimulated, there has been a positive track record of activity, and therefore it’s time to tighten the reins a bit.  Of course, being in real estate sales, we’re always “for” programs and incentives that help us sell more product, but there’s not too much on this news to argue.  Looking back, is it fair to say that maybe a big contribution to the financial crisis was due to too many loans given to too many people whose credit scores could have had a higher rating?  Could it be argued that allowing a seller to assume responsibility on 6% of a loan ($18,000 on a downtown “starter”) for a product they’re selling is really just a creative way to sneak a buyer into a purchase they really can’t afford to begin with?  And, is a minimum of 5% for a down payment really too high, or is 3.5% pretty darn low?