What will this mean?
Currently most of the livable homes sold between $90,000 and $350,000 are being purchased with FHA financing. FHA is more forgiving than conventional financing. For example a home buyer with a Short Sale can purchase a home 2 years after the Short Sale with FHA and it is 3 years for conventional. There are many other examples. Some are pathetic. But the truth is FHA adds more buyers to the market. Which is what we need to turn this market around.
FHA is being lowered to around $275,000. So, who are the buyers between $275,000 and $350,000. I mean what is their income level. First, at $275,000 the Principle and Interest on the loan is $1,561, including mortgage insurance. Let’s figure $250 for taxes and insurance and $30 for HOA. Total PITI would be around $1,841 per month. Using a 30% front end ratio this would be a couple grossing $6,137 per month, $73,644 per year, or a combined hourly wage of $36.82 per hour. Which means one making $25 per hour can have a spouse making $12 per hour and afford this home. Oh, it will be cheaper than renting.
Now at the higher end, $350,000, the Principle and Interest would be $1,987 per month. Let’s increase the taxes and insurance by $75. The full mortgage payment would be around $2,337 PITI counting HOA. That would take a monthly income of $7,791 and an annual of $93,490. This would be one income earner over $94k or any combo, say a $65k and $30k. These are very modest incomes.
So, again, what will this mean?
I see this as having the following affects:
Most of the buyers that qualify for $275-350k that need FHA will be pushed to a max of $275k plus any additional down payment they can add. This would actually make the borrower at a higher risk as they use all their savings to increase purchase power, versus having savings in the bank.
The $275,000 market will become a seller’s market. (if it isn’t already)
Pressure will slide down the price ranges.
Bidding wars in the FHA price ranges.
All in all, this should make the under $275,000 market on fire. Yay! Good for the sellers and good for the market.
But what about that $275,000 to $350,000?
That market will get hurt. Because although a $95,000 household income is good, it doesn’t support the ability to raise 10% to 20% down payments. They can save, it just takes a lot longer. Where as today, I just closed a buyer at $355,000 and their total cash to close was $12,420. That is a lot easier to save than $35,500 to $71,000. Don’t you think?
Below is the email I received about the FHA limits changing from Jeremy House.
Good evening,
You may have heard that things are about to change in the loan limit world! It’s true. Both Conventional (aka “GSE”) and FHA limits will be reduced (if Congress does not step in to change). VA loan limits will not change until at least January 1, 2012.
CONVENTIONAL LOAN LIMITS: What is changing?
In Maricopa County, we will not see a change in Conventional Loan Limits. Our limit is not above the current base limit of $417,000 (our limit is $417,000). The base limit is not what is changing for Conventional Loans therefore our Conventional Loan Limit will remain $417,000. What is changing (without an act of Congress) is the way the “high cost” Conventional Loan Limits are calculated in “high cost” areas. See below for the change in the calculation.
FHA LOAN LIMITS: What is changing?
If Congress does not act, we will feel the impact of the pending FHA Loan Limit Changes here in Maricopa County. After October 1, 2011 FHA Loan Limits are set to decrease from the current $346,250 to $271,050 in our County. The reason for the change here is based on the lowest allowed FHA loan limit or the “floor.” By law, the lowest FHA limit allowed in any County is $271,050. Based on our median price, Maricopa County’s FHA limit will revert to the floor of $271,050. “High cost” areas FHA loan limits will be calculated exactly the same way and are currently calculated the same way as the Conventional high cost limits outlined above. Here is how:
HIGH COST AREA (not Maricopa County) LOAN LIMITS – How are they calculated and what is changing?
Pre Oct 1 – FHA and Conventional Loan Limit in High Cost Area = Median Home Price x 125%
Post Oct 1 – FHA and Conventional Loan Limit in High Cost Area = Median Home Price x 115%
*national “ceiling” loan limit would drop from $729,750 to $625,500 for FHA and Conventional
I have attached 3 helpful documents for you to review:
1. Outlines the impact of the potential FHA Loan Limit Change County by County (only the 1st few pages including AZ – very large document in its entirety)
2. Outlines the impact of the potential Conventional Loan Limit Change County by County
3. White Paper on Loan Limit Changes
Please let me know if you have any questions or if I can help you and your clients! Thank you!
Your Trusted Advisor,
Jeremy House, CMPS
480-652-2004