FHA increases affect home buyers in Hampton Roads

It’s going to get harder to get a loan to buy a home in Hampton Roads now that the Federal Housing Administration (FHA) is raising the mortgage insurance premium buyers must pay in order to get an FHA mortgage according to the Wall Street Journal. Even though most buyers elect to have this fee rolled into the loan amount rather than paying it in cash at the closing table, the effect will be that borrowers qualify for less. For example, a borrower may have been approved for $200,000 before and now only qualifies for $195,000.

More significant will be the effect of legislation currently proposed in Congress to increase the downpayment requirement for FHA loans from 3.5% to 5%. While sellers are allowed to assist home buyers by covering their out of pocket closing costs, sellers are not allowed to assist buyers with paying their downpayment. The proposed move would require a buyer to put a downpayment of $10,000 down on a $200,000 house instead of the current $7,000.

While I agree in principal that it is better and safer for home owners to “have more skin in the game”, the effect of raising the down payment requirement will decrease the pool of potential buyers. If fewer buyers qualify, there will be fewer buyers to buy all the houses for sale. This will add to the downward pressure on prices.

Home sellers should take particular note. If you plan to sell a home in Hampton Roads this year, you may want to do everything you can to get it sold sooner rather than later. The hit you take in sales price to get it sold in the next 30 days may likely be smaller than the hit you’ll take later. It could be a rough ride starting this summer as the $8,000 and $6,500 tax credits end, FHA increases the MIP, and Congress increases the downpayment requirement.

Realtors often get accused of pushing sellers to list their homes at lower prices, presumably under the assumption that it will be an easier sale for them with nothing in it for the seller. When I suggest a list price lower than the one the seller had in mind, it is because I believe it will be a win-win, where we get the home sold faster and the seller nets more money. This news paints a vivid scenario of how that may exactly be the case.

If you have questions about real estate in Hampton Roads, I’d be happy to discuss them with you.

Brad Anderson, REALTOR
Keller Williams Realty
(757)816-2968
brad@bradsmyagent.com
Licensed in the state of Virginia

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2 comments so far

  1. Einkaufen on

    Isn’t it good though that we get away from the situation we were in before with people buying houses the could not afford? If I want to purchase a $200,000 home, putting down at least $10,000 seems very reasonable. If the pricing pressure brings down home prices, then starter homes at lower prices (more realistic for first time buyers) will be available again. My own home gained almost 70% in market value from 2003 – 2008 but is that really good long term? This is certainly a lot higher than standard wage or price increases so it cannot be real or sustainable. Sure, If I want to sell it is great but the next home I want to buy will have experienced the same gain so what have I really won in all that?

    • bradsmyagent on

      Dear Mr. or Ms. Shopping ;),
      I agree with you that the housing market will be stronger in the long run when people put up larger downpayments when buying a home.

      The negative as I see it, is with the timing. It would have been brilliant had FHA, Freddie and Fannie, and the government instituted these restrictions during the run-up. Enacting them now, when home prices are still falling in some areas exacerbates the problems of short sales and foreclosures. In the short run, prices will come down more sharply and cause more people at the margin to have to sell short or get foreclosued on or declare bankruptcy.

      Since we can’t play Monday morning quarterback and go back and enact these changes in 2004-2005, I guess we may as well do it now. It’s always best to rip a band-aid off quickly then slowly, don’t you think? Thank you for your comment!

      -Brad


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