If you’re house-hunting with a loan backed by the Federal Housing Administration (FHA), you may be on the hook for higher costs.
Recent and pending changes to FHA-backed loans may increase barriers to home ownership and hamper the housing market recovery.
Right now, sellers can pay 6% of the buyers’ closing costs. That helps first-time home buyers who often struggle to come up with enough cash for a down payment plus closing costs. Sellers use closing costs as a way to get buyers to buy their home.
FHA is asking home owners and those in the housing industry what they think about limiting closing cost help to 3% or $6,000, whichever is greater. FHA thinks having buyers put up more cash at closing will make them less likely to default later on their mortgages.
The problem is that making home buyers pay more at closing could slow down the real estate market recovery — particularly in areas of the country with high closing costs (that means you, home buyers in California, New York, Texas, and Utah — states with the highest closing costs, according to the NATIONAL ASSOCIATION OF REALTORS®). Seller concessions are critical in these and other areas to allowing the borrowers to buy a home without depleting all of their savings.
The closing cost proposal comes on the heels of an increase in FHA mortgage insurance premiums that took effect April 9:
- The up-front mortgage insurance premium for most FHA borrowers increased to 1.75% of the loan from 1%.
- FHA also raised its annual mortgage insurance premium for loans under $625,000 to 1.25% from 1.15%.
Meanwhile, another fee increase is scheduled to take effect on June 1, 2012: Home owners with FHA loans exceeding $625,000 will see their mortgage insurance premiums rise to 1.5%.
To be fair, the insurance premium increases will help balance FHA’s books, keeping it healthy so it can continue to provide mortgage insurance at low rates, often where the private sector doesn’t want to go. Today’s FHA allows borrowers with good credit to buy a home with as little as 3.5% down and to refinance easily.
It’s a popular program in a tough mortgage market. Roughly 40% of all new mortgages for home purchases in 2011 were backed by the FHA.
Although ensuring the agency’s soundness and stability is critical to the nation’s economic recovery, so too is a strong real estate market fueled by home purchases. And if higher home ownership costs keep buyers out of the market, that puts our recovery at risk.
So it’s important to not change the seller closing cost concessions and make sure that the insurance premium increases go back to normal levels once FHA finds its financial footing again. Otherwise, it just becomes more expensive for consumers to buy homes. And as the last few years have shown, when home prices fall, the private sector money flees the mortgage market.
How do you feel about these FHA changes?