New FHA Lending Guidelines Could Limit Buyer Pool
By Paul Esajian on October 23, 2013
Going through the entire sales process, only to find out a week before the closing date that the buyer is not approved for their mortgage, is perhaps the worst thing that can happen to seller. While this should be easy enough to avoid, changing lending guidelines may prevent a prospective buyer from knowing they are qualified. This is currently the case with recent FHA changes. The FHA was a longtime staple for homeowners looking to put down the minimum 3.5% payment in certain areas. Changes enacted on Aug 15, and put into place on Oct 15th, may permanently alter the way FHA operates. The new changes in FHA lending guidelines may prevent many prospective owners from qualifying for a loan.
The first change to FHA guidelines was almost a year ago, as credit score minimums jumped from 640 to 620. This did not have a huge impact on buyers, as the FHA still closed over 100,000 loans in April. The biggest change occurred when the FHA increased the mortgage insurance premiums they charged on every loan and made the private mortgage insurance monthly payments for the life of the loan. Not only was the borrower looking to come up with more cash out of pocket, but the monthly payments on these loans were considerably higher.
Buyers that had once been pre-qualified for an FHA loan may no longer have the benefit. Investors, in particular, are finding this difficult to deal with. Transactions are made that much more difficult to close. Furthermore, the monthly mortgage insurance may bump their debt to income ratios over the now reduced level. Both of these changes will impact buyers and force them to either come up with 5% for a conventional mortgage or wait until collections are paid off.
Closing a loan has gotten easier, but it is still a difficult process. You need to stay on top of your buyer every step of the way. Every time the mortgage broker asks for an extension, it should be met with skepticism. There could very well be a legitimate reason, but too often one extension leads to another. Soon enough, you will get a call telling you the buyer is no longer qualified. The FHA is certainly not to blame for all of the buyers’ deals dropping out. However, many buyers who went through the house hunting process, only to have their deal stalled in the last week, have felt the impact of these program changes.
Unfortunately, as a result, sellers may have less of a buyer pool. This means that you should be looking to price conservatively and get the property sold as fast as possible. Not every home will qualify for an FHA loan, even if your buyer is qualified otherwise. Any type of chipped paint anywhere in or outside the house, lack of hand railings and any mechanical issues could be a red flag and force you to make changes.
These drastic changes to the FHA program signal that the government wants to be less involved in the mortgage lending business. If you have deals you are working on, ask and find out what type of loan your buyer is using. If it is an FHA deal, you may want to see just how strong their application is.