Four New Mortgage Need-to-Knows for First-Time Homebuyers

home sold - mortgagesIf you've been saving your pennies and primping your FICO score in hopes of getting into the housing market while the getting's good (i.e., while home prices and interest rates are low), it must seem like there's a "new rule" of the new, post-bubble market to learn every time you turn around.

And there is: mortgage guidelines, the rules of engagement around distressed properties and the decision rules for making a smart buy are changing at break-neck speed. It's a sign of the times, then, that we've uncovered at least four brand, spanking new need-to-knows for today's intrepid would-be homebuyers.1) Some FHA Loan Guidelines are Getting Looser

Historically, FHA loans made up only about 10%-15% of the mortgages originated nationwide, before the bubble. These days, they're up around 30% of new mortgages; and they're particularly popular with first-time homebuyers for their low down payment requirements (3.5% down, minimum, compared with 5%, 10% or even 20% down required on many non-FHA loans) and relatively lenient credit guidelines. FHA itself puts out bare minimum guidelines on loans it will insure, but usually, the lenders that actually originate the loans impose an "overlay" of their own, more restrictive requirements. For example, FHA guidelines only require a FICO score of 580, but most lenders have long required a FICO of 620 to even look at an FHA loan application.

Until now. Recently, both Wells Fargo and Quicken Loans -- two of the nation's largest originators of FHA loans -- relented a bit on their overlay requirements, and will now consider FHA loan applicants with credit scores of 580 and above. My sources say that with that kind of credit score, borrowers will need to pony up somewhere between 5% to 10% down, but this is a definite expansion of the pool of potential borrowers who now have a shot at qualifying for FHA loans.

2) Some FHA Loan Costs are Going Up.

While FHA loans are now easier to get for the credit-impaired, they are soon to be more costly to get -- across the board. Effective April 18, the Mortgage Insurance Premium that is applied to the vast majority of FHA loans with a down payment below 10%, will increase 25 basis points. This fee change adds $250 annually per $100,000 that is borrowed. In other words, on a $250,000 home where the buyer is putting the minimum 3.5% down, this will cause a mortgage payment to increase by right around $52 a month.

If you're a homebuyer-to-be working on a very tight monthly housing budget, this may mean you have to downsize your dream home a tweak to account for this increased cost.

3) Origination Fees May be Going Down

On the other hand, mortgage origination fees may decrease for some borrowers come April 1, when a revision to the Truth in Lending Act, (aka Regulation Z,) goes into effect. Mortgage brokers will be forced to either accept payment from borrowers, or from lenders, but not both. The new law does not apply to banks; if you're currently house hunting and have been working with a mortgage broker, talk with them about how this new law will impact your own fees and rates, if at all.

4) Over time, Lending Guidelines Will Likely Get Much Tighter

The Treasury Department recently proposed a very gradual dissolution of the federal mortgage giants Fannie Mae and Freddie Mac. Five to 7 years from now, the barriers to entry into the housing market will be much, much higher than they are today. The proposal itself called for 10% minimum down payment requirements, but some in Congress are advocating that 20% should be the entry point. Home prices might not be about to spike anytime soon, so you may not feel any urgency on that front, but don't wait too long, or you could have to work much harder to leap the hurdles to homeownership.
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