Correct, as of today, 2/8/2010, the maximum seller contribution on a FHA loan is 6%. There is a proposal that it will be reduced to 3% by this summer, but there hasn’t been a clear declaration and there is no published date as of yet.
Here’s a snippet from HUD:
The current level exposes the FHA to excess risk by creating incentives to inflate appraised value. This change will bring FHA into conformity with industry standards on seller concessions.
This change will be posted in the Federal Register in February, and after a notice and comment period, would go into effect in the early summer.
The 3% guideline falls in line with conventional loans which only allow 3% unless the borrower is putting at least 10% down, in which case it rises to 6%. With more than 25% down, it is 9%.
In contrast, VA guidelines allow for a 4% seller contribution.
So, no, it hasn’t changed yet. We don’t know if it will change this summer, or if it will be retracted after the notice and comment period. The April date you were referring to is probably for the increase in the upfront MIP from 1.75% to 2.25%, which is to be in effect on 4/5/2010.
HUD is limiting the seller paid contributions to 3% on new FHA loans beginning with all FHA case numbers issued on/after April 1st 2010. They are increasing the up front mortgage insurance premium to to 2.25% (currently at 1.75%) and the monthly MIP factor will go to .75 (currently at .5 – .55 depending on loan to value ratio). These are the main changes set to take hold on April 1st.
HUD is is implementing these changes due to the default ratios on fha loans currently on the books that are draining the existing insurance pool. They believe that decreasing the maximum allowed seller contribution will minimize the chance of increasing a price on paper so the seller can contribute more towards costs enabling buyers to secure FHA financing with only their down payment of less than 5%. In my opinion the FHA minimum down payment required is headed to 5%+ in the near future.
There have also been numerous increases in credit score requirements, and pricing adjustments over the last 2 years on FHA loans. These adjustments have been required by investors on the secondary market in response to the amount of foreclosures and delinquencies on loans with less than 5% down and seller paying all closing costs. The minimum credit score on the majority of FHA loans is now 640, with a few exceptions to 580 on a purchase transaction or non-cash out refinance. FHA streamline loans require a minimum 640 with no exceptions.
Seems as though HUD and FHA and investors in FHA pools of loans are tightening the guidelines, credit score requirements, and down payment requirements as time moves forward. Limiting the seller contribution to 3% is just one more step in what will most likely be more steps to make it less likely FHA will face increasing amounts of foreclosures now and in the near future.
That will change to 3%, but it appears it will not change until early to mid summer. That means that you can take advantage of the tax credit for First Time Home Buyers. You should be working with both a Mortgage Professional and a Realtor who understand these changes and can provide guidance as you seek to purchase the right home. Remember that even if you go beyond the date when that change is implemented, you STILL will be able to obtain gifts from family to go toward closing costs.
You should review your finances now to see how much you can allocate toward a home purchase and that includes having reserves built up in savings or retirement to cover at least 2 months' worth of housing expenses. That money does not need to be spent at the closing table, but it is instrumental in the loan approval process.
There are several changes that may be coming this Spring for FHA loans. Under consideration for change are the following:
1. Reducing seller concessions to 3% from the current 6%
2. Increasing the required down payment to 5.00% from the current 3.50%
3. Increasing the up front mortgage insurance premium to 2.25% from 1.75%
Also under consideration is the increasing of the minimum credit score to 660, something that many lenders have been doing for some the past year.
All in all, considering these potential changes if you are considering purchasing a home using an FHA loan doing it sooner would be better than doing it later. These changes will mean an immediate increase of funds needed by 4.50% and many borrowers who would normally qualify for FHA loans will be frozen out of that product.
Another reason to consider purchasing now rather than later is the tax credit of potentially $8,000. This credit ends April 30th, however if you are in contract by April 30th then you have until June 30th to close.
The seller contribution amount has not changed and not exact date for the change has not been announced yet. Expect the change sometime in early summer. The change has been proposed and is in the comment stage with the Federal Registry. The only change happening with FHA on April 5th is an increase in the up front MI the current 1.75% will increase to 2.25% for standard and streamline FHA refinances. The HOPE for home owners and Home Equity Conversion loans will be set at 2.00%. The up front MI may still be financed so the additional cost will not effect your cash to close. You may read Mortgage Letter 2010-02 on the HUD website for more details.
The link below covers the announcement of the changes proposed by HUD in regards to FHA loans.
http://portal.hud.gov/portal/page/portal/HUD/press/pressreleasesmedia_advisories/2010/HUDNo.10-016 If you are looking to purchase a home and requesting a 6% seller credit you have time and should have a 30 to 60 day notice of the change.