What slice in FHA limit  means for home buyers
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By Scott Sheldon  December 20, 2013 12:00 am

The FHA announced they are reducing loan limits for 2014 in high-cost areas in an effort to scale back their role in the housing market.

Looking back to 2008, financial markets were depressed in the aftermath of the meltdown and the economy was on the verge of recession. Enter loan bailout – the Federal Housing Administration. This direct government involvement would soon become one of the most sought-after mortgage types in recent years. 

Since 2008, unemployment has fallen, job growth is slowly emerging, and real estate demand has increased. How home buyers will be affected by FHA’s 2014 scale back:

 

Haven’t purchased house yet?

The lower FHA Loan Limit will affect buyers’ higher-end property market. For example, if you take Sonoma County, the maximum new FHA loan limit in January will be reduced to $520,950, down from $662,500, which is $141,550 lower in max loan amount. Buyers affected by this change who otherwise would buy with FHA’s minimum 3.5 percent down will now need to come up with more cash, plain and simple.

 

Average FHA loan 

limit reduction – $67,250

Most counties will be affected to the tune of $67,250. In other words, when January 2014 arrives, most counties will have a reduction in their maximum loan limits by approximately $67,250, if not more.

 

Jumbos will emerge

Jumbo loans typically have tighter qualifying restrictions in terms of credit history and debt ratio requirements than its FHA  counterparts. 

For example, a buyer using an FHA loan to purchase a home with the previous foreclosure, short sale or Chapter 7 bankruptcy can do so in two to three years, wherein a jumbo reviews tarnished credit with more scrutiny. Plan on seven years from a previous foreclosure or short sale in four years on a bankruptcy in most instances unless one and/or more of the following circumstances apply. 

Foreclosure and/or  bankruptcy took place due to extenuating circumstances beyond your control or the previous transaction was a short sale over two years ago and you have 30 percent or more  as a down payment.

 

Work on your credit

A 700 credit score will be needed to be a serious home buyer. A 740 credit score will provide lower rates and fees.

 

Down payment of 20 percent

No longer will home buyers on the higher-end market be able to purchase a home with less than 20 percent down if the loan is not conforming high balance or FHA. 

In other words, 20 percent down is going to be the new normal for buyers securing jumbo money. 

Many mortgage insurance companies simply do not insure bigger loan sizes.

 

More gift money

Lenders are going to look at gift money as a viable option to help come up with the down payment needed to buy the home. 

Plan on having these monies be documented and sourced from all the parties, including full bank statements from each parties showing the paper trail of funds from point a to point z.

 

You’ll need a cushion

Mortgage lenders look at how much funds you’ll have in your bank account after the fact.  

Having additional monies in the bank to make future house payments should a financial calamity occur is a positive factor  in credit decision-making. Plan on having six months mortgage payments in the bank.

 

You may have to 

buy less house

This could end up being reality for the group of buyers who have not yet identified a property and presently are home searching with an FHA pre-approval. 

The unfortunate fact for this “buyer type” with substantial income and not enough down payment could mean putting the brakes on.

Home prices in 2013 as well as a prospectus of future home prices show strong improvement directly attributed to an improving economy as evidenced by the continual reduction in the unemployment rate with new job growth. People buy homes when they’re feeling confident about their job and the economy. 

While these changes will inevitably affect a percentage of the home buyers, this is a sign of an overall improving economy which points to good news for home equity and subsequent home sales.

 

Scott Sheldon is a local mortgage lender, with over six years of experience helping people purchase and refinance primary residences, second homes and investment properties. Visit him at www.sonomacountymortgages.com.

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