Written By: Bonnie Wilt-Hild, Op-Ed Writer
We all knew it was coming and it looks like it is here and that being the announcement in the Federal Register that HUD intends to reduce the amount a seller can contribute towards borrowers closing costs from the current 6% to 3% as indicated previously in a Federal Register publication in July, 2010. When it was first announced, I like many other industry professionals was concerned as to the disproportionately negative impact this decrease would have on low to moderate borrowers but HUD, in true good form, has implemented provisions that will protect those low to moderate income borrower who are purchasing modestly price homes to receive the seller contribution necessary to make homeownership possible. I will explain further.
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The new provision allows for a decrease in seller contribution to 3% of the sales price or $6,000 whichever is greater. The $6,000 cap will allow those low to moderate income borrowers sufficient seller help to consummate the sale of any modestly priced home maintaining the integrity of the FHA mortgage insurance program for those individuals for whom it was developed. Now I know a lot of you are thinking that this is still terrible because you will now have many borrowers (particularly on the west coast) who will no longer have the assets needed to consummate the sale of the property but I have to tell you, from an underwriting standpoint, requiring more skin in the game for those upper end purchasers just makes good sense. For those of you who have ever endured one of my underwriting training classes with FHA Online University, you will remember my long dissertation on the differences between underwriting the low to moderate income borrower versus borrowers who were purchasing in the upper price range. I always make it a point to explain that different principles apply to these borrowers and although guidelines don’t differentiate between the two borrowing classes, from an underwriting standpoint it is critical that you do.
Needless to say, the FHA mortgage insurance program was established in 1934 to serve low to moderate income borrowers as well as other underserved segments of the population and as such, underwriting guidelines were developed that would allow individuals fitting this profile to qualify for mortgages for modestly priced housing with low down payments taking into consideration such as limited credit histories, limited or no reserves as well as a lack of savings simply do to limited residual income. However, in 2007 when the market feel apart (the great mortgage implosion), FHA came to rescue by implementing FHA Secure and increasing statutory loan limits so that borrowers with sub- prime mortgage types could refinance into the more affordable FHA program at lower fixed rates. Well the sun set on the FHA Secure program but statutory loan limits remained. The one thing that didn’t change was the underwriting guidelines that were developed for the low to moderate income borrowers purchasing modestly priced home that present far less of a risk to the FHA insured mortgage fund. In as such, many upper income borrowers have been utilizing the program to purchase homes in the upper price range, in some instances as high as $750,000 however under the program they did not have to demonstrate the financial profile that someone purchasing in this price range needed to demonstrate. Things like demonstrating a sound credit history and savings pattern, some reserves after closing and reasonable down payment is something any borrower requesting a jumbo loan would be required to demonstrate and everyone that is exactly what a $729,750 loan amount is, a Jumbo, so the change is a good one.
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In closing, I think the underwriters out there feel a little better know that guidelines are being revised to take these things into consideration, it’s tough to explain to staff why one borrower doesn’t meet expectation and another borrower with the same profile does with the only difference being purchase price. The whole thing levels the playing field and still protects the low to moderate income borrower. As always, happy underwriting.
About The Author
Bonnie Wilt-Hild - As an op-ed writer, Bonnie holds mortgage underwriting position as the Senior FHA DE Underwriter for a major lending institution. With over 25+ years of senior-level FHA/VA Government underwriting experience, Bonnie is considered the "Queen of FHA Loans".