Dallas Fort Worth Area Homes and Real Estate

Beginning January 1, 2009, FHA loans will require a minimum down payment of 3.5%.  Many people won't think this is a big deal because it's only an increase of .5% over the current 3% minimum, but it's actually a little more complicated than that. 

FHA currently requires a minimum down payment of 2.25% and a minimum investment of 3%.  Huh?

That's confusing to many people, so let me take a moment to explain.  Current FHA guidelines require a down payment of 2.25%, meaning the loan amount cannot exceed 97.75% of the lesser of the sales price or the appraised value of a home.  So how to they come up with 3% down in the first place?  Well, it's kind of a wacky calculation that FHA has used up until this point in their minimum investment requirement.  The investment of 3% is a combination of 2.25% down payment and an additional .75% that can be made up of either closing costs or prepaid items.  So despite the fact that buyers were putting "3% down" on most FHA transactions, the actual equity of the 3% down that was going towards lowering the mortgage amount was only 2.25%.  This is assuming, of course, that they buyer chose the minimum down payment option for their loan.  There's no rule that says a buyer can't put down more than 3%, and some do.  But the vast majority choose the minimum down payment option.   

One good thing about this new rule is that quirky guideline is going away.  But one downside for some buyers from a cash standpoint may be that the new requirement of 3.5% is actually a true down payment that reduces the loan-to-value ratio, not just an "investment requirement", so closing costs can't count towards part of that 3.5% investment.  In other words, closing costs and prepaids no longer count towards the minimum required investment because the maximum loan-to-value ratio is changing from 97.75% to 96.5%.  SO THE ACTUAL DOWN PAYMENT REQUIREMENT IS INCREASING BY 1.25%.  

So how will this affect buyers?  In order to get into a home for the minimum 3.5% down, buyers will either 1) ask the seller to pay more closing costs to get their down payment down to the 3.5% 2) bring more money to the table, or 3) accept an interest rate that's slightly higher than "par" and either have the lender pay some closing costs or waive the origination fee. 

The bottom line is that many home buyers will be able to just come to closing with 3.5%, so the actual "out of pocket factor" is only going up by .5%.   And they will technically have 1.25% more equity in their home upon closing.  That's a good thing, but the logistics of getting into a home for the absolute minimum down payment may become slightly more complicated.  It depends on how much the seller is willing to pay in closing costs and how much the buyer is willing to pay to get the "best rate".  Since it usually only mathematically makes sense to pay origination fees if you plan to keep a house more than five years, many buyers will opt for a slightly higher rate and lower closing costs. 

HOMEOWNERS THAT ARE REFINANCING:

So how will this affect homeowners who want to refinance existing mortgages?  Actually, the new rule allows FHA refinances to have an LTV of up to 100% INCLUDING the upfront MIP premium.  So technically, the LTV requirements have loosened for them.  Prior to this rule, the total mortgage amount before MIP could not exceed 97.75%, but the new rule of 96.5% only applies to purchases.  Those who qualify for a streamline refinance need not worry since appraisals are not required on those transactions if the new loan amount doesn't exceed the original loan amount. 

Another important point is that this increase in down payment applies to ALL CASE NUMBERS ASSIGNED ON OR AFTER JANUARY 1, not to all loans that close on or after January 1.  What does this mean exactly?  An FHA case number is the I.D. number assigned to all FHA loans for a specific property once they are registered in FHA's online system.

Buyers who are looking for a home will need to have a fully executed contract on a home and their lender will have to request an FHA case number on or before the 1st.  FHA case numbers are property-specific, so simply completing a loan application will not secure the 3% down payment.  Also, if the contract on the property falls through, the FHA case number cannot be transferred to the new property. 

LINK TO MORTGAGEE LETTER 08-23 DISCUSSING THIS CHANGE.