What’s the Problem?
Fannie Mae and Freddie Mac making reckless loans with low or no down payments have got us in one of the largest financial recessions in history. Escondido sellers have definitely felt the pain. Trillions are being spent to try to fix the problem, but is history just repeating itself in a different form. This year FHA has been the financing resource that cash strapped Escondido buyers have looked to to buy Escondido real estate. The problem in a nut-shell is that the buyers using FHA finaning have very little “skin in the game.” These Escondido home buyers have been able to get loans with only 3.5% down. The minute a Escondido home closes escrow the owner is already upside down if they needed to sell the home. (It takes about 7.5% in commissions and cost to sell a home so if someone only put down 3%, they are already 4.5% in the hole when they close escrow.) This just leads to less committment by buyers and more Escondido real estate foreclosures or short sales. These problems cause the FHA financial problems.
An independent actuarial study has found that the FHA’s insurance fund reserves are far below where they should be and far below the congressionally mandated minimums. Althought FHA won’t be going away, they must find ways to increase their reserves and to become more financially stable.
Higher Down Payments
One of the ways the FHA could improve their position is to require higher down payments than the current requirement of 3.5 %. Fannie Mae’s chief credit officer in the 80’s who is now a mortgage industry consultant recommends 10%. The new requirement will probably end up at closer to 5% which borders on more irresponsible lending.
Higher Mortgage Insurance
FHA currently charges 1.75% of the loan amount for mortgage insurance premiums. These are paid through escrow and are paid upfront. Most Escondido home buyers would just roll that into their loan. In addition to the upfront mortgage insurance payment, FHA charges an annual premium, paid in monthly installments, of .5 to .55 percent depending on the down payment amount. FHA is considering an upfront of 2% and and annual increase to .6 %.
Cutting Escondido Home Seller Concessions
On of the attractive features of the FHA financing is that the agency has allowed seller concessions of up to 6% of the purchase price to go towards loan cost and closing cost. Once again this encourages buyers to have little or no “skin in the game.” Many in congress would like to see this decreased to around 2 %.
Tighter Credit Standards
FHA is by far the easiest and most flexible player when evaluating a buyers creditworthiness. It doesn’t even have a minimum FICO score requirement. FHA is also more tolerant of Escondido buyers credit history than other lenders. FHA tends to give everyone the benefit of the doubt. For example, I just had a buyer that could not get a conventional loan even with 47% down and FHA approved the same buyer’s loan with only minimum down.
It is clear that the FHA needs to improve and tighten up its practices . Is FHA going away? No! If your are considering buying Escondido real estate in the near future and are thinking of going FHA, you might want to get that Escondido home purchased before the FHA changes and tightens the rules.
