The Mortgage Scoop

Beginning January 1, 2009 the required minimum down payment will be increasing to 3.5%.  Any properties purchased before then–and for which the mortgage lender gets the FHA Case Number before January 1st–will still be able to use the smaller down payment requirements.  Seems simple, but problems lurk just beneath the surface.  (Cue the music from Jaws).

Right now buyers need to put 3% into the transaction.  Most people seem to think this means a home buyer will just need a little but more money for down payment (the difference between 3% and 3.5% on a $100,000 home would be $500).  But the impact is actually going to be much greater than this.

Out of the 3% only 2.25% is actually required to meet the down payment requirement, the rest can be used toward closing costs and prepaid items.  This generally means that if a first time home buyer in Minnesota negotiates for the seller, such as a bank to pay 3% of closing costs the buyers 3% will cover the rest.  So, really about 3.75% is need to cover typical closing costs on a FHA mortgage in Minnesota, and 2.25% for down payment.

Under the new rule, all 3.5% must count toward the down payment–which is really increasing the minimum down payment by 1.25% (from 2.25% to 3.5% which would be an extra $1,250 on a $100,000 home).  But wait, there’s more!  As I pointed out before, there is no 0.75% less of the buyer’s required money to go toward closing costs, but those costs are still there.  What’s the impact?

In Minnesota a first time home buyer would need to either bring the 3.5% down payment + the extra 0.75% for closing costs or negotiate for the seller to pay 3.75% instead of the usual 3%.  Sounds easy.  But while banks will pay closing costs on foreclosures and short sale, they normally will pay 3% max.  That’s it, not a penny more.

This means someone looking to buy a $100,000 foreclosure home using a FHA loan in Minnesota would need to cover the $750 (0.75%) in closing costs that the bank does not pay, plus the $3,500 for down payment.  A total of $4,250 would be needed, which is an increase of $1,250.  Good thing the economy is looking good right now, so these first time buyers in MN and the rest of the country have a bunch of extra cash.  Oh wait, that might be a problem, huh?  Just one more challenge to the housing market in the Twin Cities.

There is good news coming though.  Minnesota Housing will soon (January-February) be rolling out the new loan programs funded by the extra Federal money Minnesota received to battle the foreclosure problems.  You can bet there will be a healthy dose of down payment assistance and fix up or rehab funds coming out at that time.

December 24th, 2008 | Category: Mortgages | Subscribe to comments | Leave a comment | Trackback URL