The Housing and Economic Recovery Act of 2008 revised the National Housing Act and the down payment requirements for FHA loans to:
1) Require that the mortgagor “shall have paid, in cash or its equivalent…an amount equal to not less than 3.5 percent of the appraised value of the property….”;
2) Eliminate the variable loan-to-value limits that were based on the combination of the property value and the average closing costs of the State where the property is located (also known as “down payment simplification”); and
3) Limit the total FHA-insured first mortgage to 100 percent of the appraised value, and require the inclusion of the upfront mortgage insurance premium (UFMIP) within that limit.
The revised down payment requirement takes effect with all new FHA case number assignments (new applications) on or after January 1, 2009.
Closing costs may not be used to help meet the minimum 3.5% down payment requirement. Closing costs are not considered in the mortgage amount/down payment calculation for purchase money mortgages.
For purchase money mortgages, the maximum LTV is 96.5 percent, i.e., the reciprocal of the 3.5 percent down payment requirement. The examples that follow will use 96.5 percent and apply it to the lesser of the appraiser’s estimate of value or the adjusted sales price. The examples do not include UFMIP or closing costs to be paid by the borrower.
When combined with the FHA first mortgage, government subordinate liens are not limited to 100 percent. When a unit of government or an instrumentality of one is offering down payment and/or closing costs assistance in the form of secondary financing, the CLTV can exceed 100 percent of the appraised value.
The maximum mortgage is calculated by applying 96.5 percent to the lesser of either a) the appraiser’s estimate of value or b) the contract price for the property minus any required adjustments.
Example 1
Sales Price: $218,000 Appraiser’s Estimate of Value: $220,000 Maximum Mortgage: $218,000 x 96.5% = $210,370 Down payment: $218,000 – 210,370 = $7630 The maximum mortgage shown does not include any upfront mortgage insurance premium, and the example does not consider any closing costs that must be paid by the borrower.
Sellers are still permitted to provide financing concessions up to 6 percent of the sales price. Amounts exceeding six percent must be subtracted from the sales price (or value, if less) before applying the down payment percentage multiplier. Other inducements to purchase must also be subtracted from the sales price or value, as appropriate, in calculating the maximum mortgage amount/down payment. In such cases, the actual down payment is increased by the amount of the inducement.
Example 2
Sales Price: $218,000 Appraiser’s Estimate of Value: $220,000 Gift Card worth $3000 Adjustment to Sales Price: $218,000 - $3000 Maximum Mortgage: $215,000 x 96.5% = $207,475 Down payment Calculation: $218,000 - $207,475 = $10,525
The calculation of the maximum mortgage requires that the gift card value, which was provided by the builder at closing, be subtracted from the sales price and, thus, the 96.5 percent applied to $215,000 rather than $218,000. The down payment, of course, is calculated by subtracting the mortgage amount from the actual contract sales price.
Refinances, including FHASecure refinances, are not subject to the 3.5 percent down payment requirement since there is no “down payment” on a refinance. The LTV will be calculated, as it has been, by dividing the loan amount prior to adding the UFMIP by the appraiser’s estimate of value. However, the loan amount, including the UFMIP, may not exceed 100 percent of the appraiser’s estimate of value for all new case number assignments made on or after January 1, 2009; this will result in various refinancing products including rate-and-term, FHASecure (including refinances of both non-delinquent and delinquent mortgages), streamlined refinances, and cash-out refinances having possibly different LTVs before adding the upfront mortgage insurance premium.
Example 3
Appraiser’s Estimate of Value: $220,000 UFMIP of 1.5% Maximum Mortgage before adding UFMIP = $216,749 Maximum Mortgage w/UFMIP = $216,749 + $3251 = $220,000 LTV before UFMIP: $216,749/$220,000 = 98.52%
This example assumes that the borrower’s payment of the existing first lien, closing costs, amount to establish a new escrow account, discount points, etc., yield an amount before adding the UFMIP of at least $216,749. Any shortfall would require payment in cash. If less is needed to extinguish the existing mortgage and pay associated transaction costs, a lower amount is required before adding the UFMIP. (The amount of mortgage before adding the UFMIP can be determined by adding the insurance premium percentage, in this example 1.5%, to 100% and then dividing that result into the appraiser’s estimate of value ($220,000/1.015 = $216,749 (rounded up).
In most locations, the maximum FHA loan amount for a single family home is $271,050. There are provisions for higher loan amounts in high cost areas of the country.
1) Require that the mortgagor “shall have paid, in cash or its equivalent…an amount equal to not less than 3.5 percent of the appraised value of the property….”;
2) Eliminate the variable loan-to-value limits that were based on the combination of the property value and the average closing costs of the State where the property is located (also known as “down payment simplification”); and
3) Limit the total FHA-insured first mortgage to 100 percent of the appraised value, and require the inclusion of the upfront mortgage insurance premium (UFMIP) within that limit.
The revised down payment requirement takes effect with all new FHA case number assignments (new applications) on or after January 1, 2009.
Closing costs may not be used to help meet the minimum 3.5% down payment requirement. Closing costs are not considered in the mortgage amount/down payment calculation for purchase money mortgages.
For purchase money mortgages, the maximum LTV is 96.5 percent, i.e., the reciprocal of the 3.5 percent down payment requirement. The examples that follow will use 96.5 percent and apply it to the lesser of the appraiser’s estimate of value or the adjusted sales price. The examples do not include UFMIP or closing costs to be paid by the borrower.
When combined with the FHA first mortgage, government subordinate liens are not limited to 100 percent. When a unit of government or an instrumentality of one is offering down payment and/or closing costs assistance in the form of secondary financing, the CLTV can exceed 100 percent of the appraised value.
The maximum mortgage is calculated by applying 96.5 percent to the lesser of either a) the appraiser’s estimate of value or b) the contract price for the property minus any required adjustments.
Example 1
Sales Price: $218,000 Appraiser’s Estimate of Value: $220,000 Maximum Mortgage: $218,000 x 96.5% = $210,370 Down payment: $218,000 – 210,370 = $7630 The maximum mortgage shown does not include any upfront mortgage insurance premium, and the example does not consider any closing costs that must be paid by the borrower.
Sellers are still permitted to provide financing concessions up to 6 percent of the sales price. Amounts exceeding six percent must be subtracted from the sales price (or value, if less) before applying the down payment percentage multiplier. Other inducements to purchase must also be subtracted from the sales price or value, as appropriate, in calculating the maximum mortgage amount/down payment. In such cases, the actual down payment is increased by the amount of the inducement.
Example 2
Sales Price: $218,000 Appraiser’s Estimate of Value: $220,000 Gift Card worth $3000 Adjustment to Sales Price: $218,000 - $3000 Maximum Mortgage: $215,000 x 96.5% = $207,475 Down payment Calculation: $218,000 - $207,475 = $10,525
The calculation of the maximum mortgage requires that the gift card value, which was provided by the builder at closing, be subtracted from the sales price and, thus, the 96.5 percent applied to $215,000 rather than $218,000. The down payment, of course, is calculated by subtracting the mortgage amount from the actual contract sales price.
Refinances, including FHASecure refinances, are not subject to the 3.5 percent down payment requirement since there is no “down payment” on a refinance. The LTV will be calculated, as it has been, by dividing the loan amount prior to adding the UFMIP by the appraiser’s estimate of value. However, the loan amount, including the UFMIP, may not exceed 100 percent of the appraiser’s estimate of value for all new case number assignments made on or after January 1, 2009; this will result in various refinancing products including rate-and-term, FHASecure (including refinances of both non-delinquent and delinquent mortgages), streamlined refinances, and cash-out refinances having possibly different LTVs before adding the upfront mortgage insurance premium.
Example 3
Appraiser’s Estimate of Value: $220,000 UFMIP of 1.5% Maximum Mortgage before adding UFMIP = $216,749 Maximum Mortgage w/UFMIP = $216,749 + $3251 = $220,000 LTV before UFMIP: $216,749/$220,000 = 98.52%
This example assumes that the borrower’s payment of the existing first lien, closing costs, amount to establish a new escrow account, discount points, etc., yield an amount before adding the UFMIP of at least $216,749. Any shortfall would require payment in cash. If less is needed to extinguish the existing mortgage and pay associated transaction costs, a lower amount is required before adding the UFMIP. (The amount of mortgage before adding the UFMIP can be determined by adding the insurance premium percentage, in this example 1.5%, to 100% and then dividing that result into the appraiser’s estimate of value ($220,000/1.015 = $216,749 (rounded up).
In most locations, the maximum FHA loan amount for a single family home is $271,050. There are provisions for higher loan amounts in high cost areas of the country.
FHA loans are good options if 1) the loan amount is equal to or less than $271,o50 2) the borrower makes less than a 5% down payment 3) the seller of the property is paying more than 3% of the sales price in sales concessions or costs that would otherwise be paid by the borrower and/or 4) the borrower has deferred student loans with monthly payments that cause their debt to income ratio to rise above about 43%. If the borrower is making a 10% or greater down payment, conventional financing is usually more favorable.
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