Sue Fox, @Properties. Direct 773.816.1788

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FHA tightens the purse strings

filed under: Buyers, FHA loans, First-time buyers, Market conditions posted on January 24th, 2010

The FHA crackdown spells bad news for Chicago buyers.

With more buyers using FHA, the government is tightening the rules to make sure borrowers are prepared to repay their loans.

Alarmed by rising loan defaults, the Federal Housing Administration this week announced that it was clamping down on the cash that is now financing a quarter of all U.S. home purchases. In the Chicago area, already gripped by high unemployment, this means it will be even harder to buy and sell property in the coming months, especially for people with spotty credit or little cash available for a down payment and closing costs.

Here are some of the changes:

* Buyers with credit scores of 580 or lower will now have to put down at least 10% of the home’s purchase price. People with better credit can put just 3.5 % down.

* FHA’s mortgage insurance premium, which buyers are required to pay, is going up from 1.75% to 2.25% of the loan amount.

* Sellers can now credit buyers 3% or less of the purchase price towards closing costs, down from 6%.

    From where I stand, the mortgage insurance premium increase will be the most significant for most buyers. For loans of $200,000 and above, for instance, the new rules will add another $1,000 or more to their costs. It’s just one more hurdle to overcome, and for people who are scraping together every last penny, cashing in 401(k) accounts and borrowing cash from parents to buy their first home, it may mean the difference between buying and renting for another year.

    Written by Sue Fox //

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