My New Blog

All too soon FHA loans, those most often used by first-time home buyers, will be changing. For a long time they have been the most appealing loan type for buyers not "buying up" and therefore without a lot of cash on hand from, for example, the sale of a first home.

What we don't know is exactly when it will happen, but mortgage industry people are speculating April this year. We don't know exactly what is going to change, but the FHA have given the mortgage industry a few potential scenarios. These scenarios all have one thing in common; more cash outlay from the buyer.

This is very impactful and important news for home buyers as, up til now, with an FHA loan they've only needed to have 3.5% downpayment.
Okay, so closing costs and financing is definitely a mortgage guy's expertise but it's going to affect every sale after the next few months so I've been staying on top of it. Here's what I can tell you - again, not definitively but potentially.

Things are getting tighter on mortgages as time goes on. Right now there are three potential big guideline changes that will affect the amount of cash you will need to buy a house:
- A minimum of only 3.5% down payment. Looks very likely to go up but could only go up to 4% but possibly 5%.
- Up to 6% seller contribution/payment of your closing costs. This one looks pretty certain to go down to 3%.
- A mortgage insurance premium that will potentially go up a bit at the closing table but for consequent months looks to stay the same.
These changes may or may not happen but it has been said by the FHA that some of them likely will and they are thinking April 1st could be the date.  Wish I had a better functioning 8-Ball.

Cash, negotiations and the sale.
What I often do is try to negotiate so that the buyer doesn't have to put down more cash than necessary - unless of course they want to put a chunk of money down. Most don't. Cash is costly to borrow and having it to a) keep in reserve for repairs and b) getting the home into the condition they want it in makes cash valuable.

So, what I often do is recommend that we up the offer price by however much you'd like covered of your closing costs by the seller. People refer to this as "seller paying your closing costs" but really, in the situation of us upping the price you're paying for the home, the seller will net the same amount once they've covered some of your closing costs. What you've done by upping your loan amount is roll some of those closing costs into your loan so you can pay a few more dollars a month in your mortgage payment but keep a big chunk of cash. I hope this makes sense. I find it to be one of the most challenging principles to explain.

An example: House for sale for $135K.
You want to pay $129K for it. You also want the seller to cover as much of the closing costs as possible in order to keep as much cash in your pockets as possible.
Your closing costs are approx $11,000.  As of right now, FHA allows a seller to pay for/contribute up to 6% of the contract price amount towards your closing costs. In this case we're going to say that's $8,040 (based on the inflated price). On the other hand, the buyer/You HAVE to put down $4,690 (3.5%) towards the closing costs.

The math then is: $11,000 - $4,690= $6,310 is the amount leftover that theoretically could be paid by the seller.
If we then up the offer by $5,000 to $134,000, we can ask the seller to pay $5,000 of your closing costs. You ultimately bring to the closing table: $6,000.

Okay, that's a lot to take in but just by reading this you are in the minority of folks who are on top of the changes that are coming down the pipeline and will affect buyers and sellers both.