The guidelines are actually easily accessible so I thought I would post them here.  If you are a realtor I would encourage you to read chapter 3 of HUD handbook 4150.2 which you can access HERE and chapter 2 of HUD handbook 4905.1 which you can access HERE.

Since underwriters don’t make visible inspections of homes they reply on the appraiser to inspect the home and highlight any “lender required repairs”.

“…FHA announced a new premium structure for FHA-insured single family mortgages: as of this spring, the annual mortgage insurance premium (MIP) will increase by 0.10 percent for loans under $625,500 and by 0.35 percent for loans above that amount;  and upfront premiums (UFMIP) will increase by 0.75 percent…these changes would have a minimal effect on homeowners.“

Currently, borrowers who opt for a FHA 30-year fixed rate putting the minimum 3.5% down payment finance an upfront mortgage insurance premium equal to 1% of their loan and then pay monthly mortgage insurance based on a 1.15% annualized premium.  Under the new structure the upfront mortgage insurance premium will increase to 1.75% (+.75%) and the annualized premium used to determine the monthly mortgage insurance payments will increase to 1.25% (+.10%).

How do these changes impact mortgage payments?  Here is a chart comparing the new and old structures based on a $200,000 purchase price, 3.5% down payment, for a 3.75% FHA fixed rate:

What does this mean for homebuyers?  It means monthly payments will rise.  On a hypothetical purchase of  a home for $215,000 the total monthly “PITI+MI” payment would increase from $1,509 to $1,552; an increase of $43 per month.

To avoid this change homebuyers would have to be in contract to buy a home a couple days before April 17th so that the lender could register the loan with HUD prior to the change.  The upfront mortgage insurance premium that gets financed into the loan amount would remain unchanged at 1.00%.

Current MI arrangement for >95% loan-to-value per $100,000

Loan Amount: $100,000

Upfront Mortgage Insurance Premium (2.25%): $2,250

Total Loan Amount: $102,250

Monthly Mortgage Insurance Premium (.55%): $45.83

Monthly Principal & Interest + Mortgage Insurance @ 4.50%: $563.92 (does not include property taxes or homeowner’s insurance)

New MI arrangement for >95% loan-to-value per $100,000 as of September 7 October 4th, 2010

Loan Amount: $100,000

Upfront Mortgage Insurance Premium (1.00%): $1,000

Total Loan Amount: $101,000

Monthly Mortgage Insurance Premium (.90%): $75.00

Monthly Principal & Interest + Mortgage Insurance @ 4.50%: $586.75 (an increase of 4.05%-does not include property taxes or homeowner’s insurance)

See the spreadsheet HERE.

Currently, for a homebuyer that buys a home for $250,000 and puts the minimum 3.5% down that is required by FHA financing their monthly mortgage insurance premiums are $110.57.  Their total principal, interest,  property taxes, homeowner’s insurance, and mortgage insurance (PITI) is about $1,737.

With the proposed mortgage insurance the same homebuyer would have monthly mortgage insurance premiums of $311.61 (181% increase).  Their projected PITI payment would be $1,938 (11.6% increase).

The bill has yet to become law but I suspect that it will.  It’s unclear at this point how quickly the new provisions would be put in place.  I’m curious to know how happy the private mortgage insurers are about this.  The increase of mortgage insurance premiums should generate a lot more business for them.

One quick note that is generally applicable to all three sources.  Typically funds derived from a retirement plan used towards the purchase of a home may only be used as a down payment and “usual or reasonable settlement costs” and may not be used to pay other debts in order to qualify for a new mortgage.

401K

Rules for each 401K plan are slightly different so homebuyers need to talk with their plan administrators to make sure they can use their 401K.  Technically, a person cannot generally withdraw money from their 401K to use towards the purchase of a home.  Instead most 401K plans will allow participants to borrow money from their 401K and pay it back with payroll deductions.  For funds being used to purchase a home the repayment period can be longer than the normal required period of 5 years but check with the plan administrator to make sue the payments won’t be onerous .

The plan will usually assign an interest rate to the loan but because the participant is paying and receiving the interest the effective cost of borrowing is 0%.  However, while the loan is outstanding keep in mind that it is  not receiving investment appreciation so the true cost of tapping into a 401K is the “opportunity cost”.  Homebuyers wishing to use their 401Ks should consider the impact this will have on their future ability to retire.  Also, keep in mind that repayment of a 401K loan is made with after-tax dollars.

Typically the maximum a person can borrow from their 401K is the lesser of $50,000 or 50% of their vested balance.  If the vested balance is less than $20,000 then sometimes they can borrow up to the vested balance or $10,000 whichever is greater.

It’s important to note that a person does not have to be a first-time homebuyer to use 401K funds.  It’s also important to note that because the homebuyer will pay back the 401K loan with payroll deductions then it is generally not possible to access funds in a 401K with a previous employer.  The homebuyer must currently be working for the plan sponsor.  This also creates a significant risk because if the employee is terminated during the repayment period on the loan and cannot pay back the remaining balance the amount will be treated as a non-qualified distribution and be subject to ordinary income tax plus a 10% penalty.

Please note that some 401K plans do allow “hardship” withdrawals for participants who qualify as a first-time homebuyer.  However, these distributions are taxable so unless cash-flow is a major concern often times a loan will make more sense.

IRA

IRAs are different from 401Ks in that a person is  able to take distributions instead of having to take out a loan.  The question then becomes whether or not the distribution will be a deemed a “qualified” or “non-qualified” distribution.  A “qualified” distribution IS NOT subject to a 10% penalty while a “non-qualified distribution” is subject to a 10% penalty.

In order for a distribution to be qualified the homebuyer must be a first-time homebuyer which the IRS defines as a person who has not owned real estate in the previous 24 months.  The $10,000 cap is a lifetime limit so once a person has utilized the $10,000 they may not use it again.

So long as the contributions to the IRA were tax deductible for the homebuyer then the distribution will be taxed as ordinary income.  If the distribution does not meet the criteria of being a “qualified” distribution then it will also be subject to a 10% penalty.  Since the homebuyer will typically incur income tax liability for an IRA distribution it’s important they account for that when budgeting out their money from the time of distribution to the following April 15th when taxes are due.

Roth IRA

The rules for Roth IRA distributions used towards the purchase of a home are similar to the aforementioned traditional IRA guidelines in that it is only available for those who meet the IRS’s definition of a first-time homebuyer and is only available up to $10,000.  However, there are a couple key differences.

One key difference is that for a distribution to be “qualified” it may not be made inside  a 5-taxable-year period which begins January 1st of the taxable year for which the very first contribution was made to any Roth IRA the homebuyer owns.  In other words, for a first-time homebuyer who wishes to take a “qualified” distribution from their Roth IRA account anytime in 2010 must have made their very first Roth IRA contribution (to any Roth account) no later than the 2005 tax year.

The other key difference is taxation.  Because Roth IRA contributions are not tax deductible at the time of contribution “qualified” distributions are not treated as taxable income.  However, if the distribution is not deemed to be “qualified” then it will be subject to a 10% penalty and depending on the contributions made and distribution taken may also have income tax implications.

I hope this summary enables homebuyers out there to make better decisions with their money.  Please remember that I am not a tax professional and tax code is subject to change.  It is best to discuss your options with a knowledgeable professional when you are close to make such a decision.  It is also important to consider the impact that the decision will have on your ability meet your retirement accumulation goals.

If you’ll recall last September FHA announced that their capital reserves (used to insure FHA mortgages) fell below mandated levels.  These changes are designed to raise more money to boost those reserves and tighten their underwriting requirements so that the loans they are insuring are less risky.

These changes take effect for loan applications after April 5th, 2010.  I’ve underlined what I think are the most relevant changes for consumers and real estate professionals to be aware of:

1. Mortgage insurance premium (MIP) will be increased to build up capital reserves and bring back private lending
   • The first step will be to raise the up-front MIP by 50 bps to 2.25% (it is currently 1.75%) and request legislative authority to increase the maximum annual MIP that the FHA can charge.
   • If this authority is granted, then the second step will be to shift some of the premium increase from the up-front MIP to the annual MIP (this will increase monthly payments).
   • This shift will allow for the capital reserves to increase with less impact to the consumer, because the annual MIP is paid over the life of the loan instead of at the time of closing
   • The initial up-front increase is included in a Mortgagee Letter to be released tomorrow, January 21st, and will go into effect in the spring.
2. Update the combination of FICO scores and down payments for new borrowers.
   • New borrowers will now be required to have a minimum FICO score of 580 to qualify for FHA’s 3.5% down payment program. New borrowers with less than a 580 FICO score will be required to put down at least 10%.
   • This allows the FHA to better balance its risk and continue to provide access for those borrowers who have historically performed well.
   • This change will be posted in the Federal Register in February and, after a notice and comment period, would go into effect in the early summer.
3. Reduce allowable seller concessions from 6% to 3% (this will make it more difficult for first-time homebuyers to buy-down their rate and/ or require they have more cash to close)
   • The current level exposes the FHA to excess risk by creating incentives to inflate appraised value. This change will bring FHA into conformity with industry standards on seller concessions.
   • This change will be posted in the Federal Register in February, and after a notice and comment period, would go into effect in the early summer.
4. Increase enforcement on FHA lenders
   • Publicly report lender performance rankings to complement currently available Neighborhood Watch data – Will be available on the HUD website on February 1.
     • This is an operational change to make information more user-friendly and hold lenders more accountable; it does not require new regulatory action as Neighborhood Watch data is currently publicly available.
   • Enhance monitoring of lender performance and compliance with FHA guidelines and standards.
     • Implement Credit Watch termination through lender underwriting ID in addition to originating ID.
     • This change is included in a Mortgagee Letter to be released tomorrow, January 21st, and is effective immediately.
   • Implement statutory authority through regulation of section 256 of the National Housing Act to enforce indemnification provisions for lenders using delegated insuring process
     • Specifications of this change will be posted in March, and after a notice and comment period, would go into effect in early summer.
   • HUD is pursuing legislative authority to increase enforcement on FHA lenders. Specific authority includes:
     • Amendment of section 256 of the National Housing Act to apply indemnification provisions to all Direct Endorsement lenders. This would require all approved mortgagees to assume liability for all of the loans that they originate and underwrite
     • Legislative authority permitting HUD maximum flexibility to establish separate “areas” for purposes of review and termination under the Credit Watch initiative. This would provide authority to withdraw originating and underwriting approval for a lender nationwide on the basis of the performance of its regional branches

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