FHA Upcoming Downpayment Changes Effective January 1

Written By: Stacey Sprain,
Certified Ambassador Loan Processor (CALP)

HUD sure makes things confusing sometimes don’t they? With so many changes already in place and coming up with the New Year, I thought it might be a good time to run down a list so that everyone can prepare for January 1st. I’ve run across a few folks who are confused as to guideline changes and effective dates so this will serve as a helpful reminder. Effective for FHA purchases in which cases are assigned on and after January 1st, the minimum downpayment requirements change from the current structure which is a mass of varying requirements based on purchase price and location. Those calculations, which often prove to be very confusing, are being replaced by a simple 3.5% downpayment requirement/96.5% loan-to-value max limit across the board. This calculation will make things much simpler industry-wide when it comes to calculating the purchase maximum mortgage amounts.

However, with the new calculations come a few drawbacks. To date, borrowers have been able to roll in allowable closing costs up to their maximum loan-to-value but effective January 1st, closing costs are no longer allowed to be rolled into max mortgage. Closing costs no longer may be used to meet the minimum investment requirement on FHA purchase transactions. The borrower is responsible for covering the amounts of closing costs, prepaids and 3.5% downpayment required for settlement.

Now the seller-funded downpayment assistance options have been eliminated, this causes some concern for borrowers who have little monies saved for downpayment who wouldn’t qualify for any 100% conventional financing program options due to credit restrictions. So what are borrower options for covering the closing cost, prepaid and downpayment requirements on and after January 1st?

Interested-party contribution limits are not changing so sales agreements may still be written with the seller, realtor, builder and/or lender crediting up to 6% of the purchase price toward borrower closing costs and prepaids. As for the 3.5% downpayment, borrowers may still receive gift funds from relatives, may still receive government homebuyer grant funding in eligible areas, and may use secured funds in the form of a loan against a 401-k plan or other secured asset, or sale of personal property.

In regards to FHA up-front MIP and annual mortgage insurance premiums, these are already in place effective for cases assigned on and after October 1st and will NOT be changing with the downpayment requirement changes. For more info on the MI premiums, refer to Mortgagee Letter 2008-22.

Maximum LTV limits for refinances are explained in Mortgagee Letter 2008-13 and the attachment that was provided.

An important reminder regarding the upcoming downpayment requirement change- Don’t forget to update your loan origination software system as needed. Your existing Good Faith Estimate template(s) may need to be updated to remove the financing of allowable closing costs and may need to incorporate the new simplified downpayment requirement for 96.5% of the lower of purchase price or appraised value. If you utilize software with a major provider like Calyx Point, Contour Loan Handler or Ellie Mae Encompass, you may wish to contact your account representative for an update on what they are planning and when software updates may be expected.

About the Writer. As one of NAMP's volunteer writers, Stacey Sprain is currently a NAMP member in good standing and is a NAMP Certified Ambassador Loan Processor (CALP). If you would like to become a volunteer writer for NAMP, please email us at: blog@mortgageprocessor.org.