Checking The Pulse Of The Kansas City Real Estate Market

A late 2009 poll of Realtors who are a member of the National Association of Realtors indicates that 39% of  mortgage loans in recent months were Federal Housing Administration (FHA) loans. So it’s important to note that new FHA guidelines are planned to go into effect sometime this spring. These new guidelines will make it more complicated to get a FHA loan and a little costlier too.  On one hand, I don’t want to hear of anything that makes it more restrictive for Kansas City home buyers to get a loan. On the other hand, keeping FHA on solid ground is absolutely essential to the housing market, even if it means some buyers will no longer qualify for a FHA loan.  Keep in mind that FHA provides the majority of loans to first time home buyers — and nearly half of the home sales were seeing today ARE first time home buyers. “Striking the right balance between managing the FHA’s risk, continuing to provide access to underserved communities, and supporting the nation’s economic recovery is critically important… When combined with the risk management measures announced in September of last year, these changes are among the most significant steps to address risk in the agency’s history. Additionally, by continuing to provide affordable, responsible mortgage products, FHA will support the housing market’s recovery. Importantly, FHA will remain the largest source of home purchase financing for under served communities.” — FHA Commissioner David Stevens

The big changes that are coming include a requirement that home buyers have a  minimum 580 FICO score to qualify for the standard 3.5% minimum down payment. If your FICO score is lower than a 580 you MUST have a minimum 10% down payment. This may seem like a bad idea to some, but the low-down and no-down home loans that were made the past decade played a huge role in the number of defaulted loans we’ve seen.  So if you have a 570 credit score you’ve shown you are a huge credit risk. Giving out loans is all about risk management (or should be) and, by requiring a 10% down payment, FHA will either (a) run off the buyers most likely to default on a loan or (b) hold the buyers hand to the fire by requiring a 10% down payment. It will certainly be a whole lot harder for a borrower to throw their hands in the air and walk away from a 10% down payment than it was to walk away from a 3% down payment (which is all that was required as recently as a year ago).  Then again there may not be many of these 10% down loans anyhow because I don’t know any lenders handing out loans to buyers with credit score in the 500’s.

Another of the new guidelines is that seller paid concessions may NOT exceed 3% of the sales price of the home — the maximum allowed previously was 6%. This means on a home that goes under contract for $100,000, a buyer can not get the seller to pay more than $3,000 of the buyer’s allowable closing costs. The old system would have allowed $6,000. But here’s why this change should matter very little… Very few sellers were willing to pay more than 3% of a buyer’s closing costs anyhow.  Still, I’ve heard many other agents screaming this could be a huge problem for borrowers. But even if a seller were willing to pay 4, 5 or 6% of a buyers allowable closing costs, I simply can’t see any appraiser allowing the home to appraise for the purchase price PLUS a huge amount in seller-paid closing costs. To be honest, you’re asking for trouble even getting a home to appraise for ONE PERCENT more than the purchase price in today’s market.

There’s one other change guaranteed to have an effect on ALL borrowers getting a FHA loan. The up front mortgage insurance premium (MIP) required on FHA loans will increase from 1.75% to 2.25%. On a $100,000 mortgage, this means the up front fee would increase from $1,750 to $2,250 – thus you can expect a $500 increase for every $100,000 of mortgage. As always, buyers will still be able to finance this amount into their loans — but it’s a real cost increase when getting a FHA loan going forward. If you’re considering getting a FHA loan, these are all factors to take into consideration and discuss with your mortgage loan officer. Again, these guidelines are estimated to go into effect sometime later this spring.

Posted by Jason A. Brown