Prairieville home buyers, if you are planning on buy a home with FHA financing, listen up!
For over 50 years, FHA has helped those with less than perfect credit buy homes by guaranteeing the loans, but recent announcements by HUD Secretary Shaun Donovan indicate that major changes are on the way for both consumers and lenders. Since the Great Depression, FHA has backed loans actually written through member banks. Over the years, it has provided an alternative financing process that some sellers looked down on because it took longer. In recent boom times, FHA was only called on to guarantee about 3% of all mortgages. Buyers got their loans with as little as 3.5% down and with 500 credit scores though most participating lenders required a score of 620 or more. Sellers could contribute up to 6% of the closing costs.
The recent mortgage crisis has affected FHA dramatically. Over the last few yours, FHA suddenly has been called upon to back 30% of mortgages and 20% of refinancing deals on homes up to $729,750. In an era when many homeowners have defaulted on loans, FHA cash reserves are at the lowest since 1994 and serious losses are projected for the next five years with over 71% of the losses coming from loans already on the books. FHA has been called upon to back not just loans on starter homes but on more costly move up homes as well. The defaults have hit them hard.
To prevent further losses, Donovan said the new plan would force potential buyers “to put more skin in the game” which would prevent further losses and stabilize the system. The new rules would require buyers to put up a 5% down payment, raise required credit scores to a yet undetermined level, and decrease the amount of contribution the seller can make to the closing costs. The agency is also considering whether to increase the monthly insurance fee borrowers pay.
HUD is also changing the rules for lenders, especially those who repeatedly make questionable loans. All lenders will be held accountable for losses, and will be ranked on a “lender’s scorecard” of banks who make FHA loans. Lenders will have to submit annual financial reports and maintain higher net worth. Weak lenders will lose their ability to process FHA loans. The agency does not want to be the source of the next “subprime crisis” in lending.
Will making it harder it to buy a home have the desired effect of reducing future loses for FHA? The jury is out on this. Some critics of the new rules are more apt to blame unemployment and other disruptions in personal finance (i.e., divorce, death of spouse, illness or disability, unforeseen expenses) to cause people to get into mortgage trouble than how much down payment they paid.
FHA has not yet announced when the new rules go into effect but if the new down payment and credit score requirements would make a difference as to whether you could afford to buy a home now or not, waste no time in calling Sandy Ogburn Sandlin. She and her team will discuss your options with you as you consider your new home in Baton Rouge, Prairieville, Gonzales, Denham Springs, Watson, Walker, Central, Greenwell Springs, Zachary, Baker, Port Allen, Brusly, Geismar, and St Amant. We can also you answer any questions you might have about the home buyer's tax credit - $8,000 first time buyers or $6,500 for repeat buyers.