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Revised Downpayment and Maximum Mortgage Requirements

The Housing and Economic Recovery Act of 2008 revised the National Housing Act to:

  • Increase the down payment requirement for new FHA purchase loans. Effective January 1, 2009, the down payment requirement for FHA purchase loans will be raised to 3.5%, translating to a maximum loan to value (LTV) ratio of 96.5%. The down payment requirement is currently 3% on mortgage purchase loans (97% LTV). Section 203(k), Section 203(h) for disaster victims, and FHA's Energy Efficient Mortgage (EEM) programs are not affected by the new LTV limit.
  • 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").
  • 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.
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Does the new down payment requirement include closing costs?
Closing costs are not considered in the mortgage amount/down-payment calculation for purchase money mortgages, so they may not be used to help meet the minimum 3.5% down-payment requirement. Thus, closing costs must be paid in addition to the 3.5% down-payment requirement.

What about a FHA refinance?
Refinances, including FHASecure refinances, are not subject to the 3.5% 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 Up Front Mortgage Insurance Premium (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 FHA refinance loans made on or after January 1, 2009. Lower fico scores are not always a problem as HUD encourages bad credit refinancing with FHA in cases where the borrower has rebounded and become a lower risk then their credit score indicates.

Other Provisions under the Housing and Economic Recovery Act of 2008
When combined with the FHA first mortgage, government subordinate liens are not limited to 100 percent. When a government agency is offering down-payment and/or closing costs assistance in the form of secondary financing, the combined loan to value (CLTV) ratio can exceed 100 percent of the appraised value.

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. So, if the sale price of the house is $218,000 and the seller is providing $3,000 in down payment assistance, the 3.5% down payment is calculated after subtracting the $3,000 gift. It would apply to $215,000 instead of the $218,000 original price of the property.

Source: Mortgagee Letter 2008-23


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All FHA mortgage products are provided by FHA Home Loan Services, which may arrange loans with third party providers. FHA Home Loan Services is national mortgage lender. Not everyone will qualify for a government insured mortgage. FHA Home Loan Services cannot guarantee all loans will be made or whether all loan applications will be approved by the investing bank.
This is not a commitment for a FHA house loan or an advertisement for credit as defined by paragraph 226.24 of regulation Z.
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