New FHA Lending guidelines to start on October 1st, 2008

The housing bill that was signed this week included two major changes for FHA lending guidelines.  The changes are scheduled to kick in on October 1, 2008.The first change is the minimum down payment requirement.  Currently FHA loans require 3% down.  On a $200,000 purchase this would be $6,000.  The housing bill will increase this minimum down to 3.5%.  On that same $200,000 home, the down payment will now be $7,000.The second major change is the elimination of seller funded down payment assistance.  Currently the seller can contribute up to 6% to the buyer to cover their down payment and closing costs on an FHA loan.  These funds are deducted from the sellers equity and credited to the buyer at closing with a non-profit intermediary.  This has allowed buyers to take advantage of 100% financing.One of the main reasons this is being eliminated is that FHA found the foreclosure rate to be about 80% higher on loans with down payment seller assistance verses FHA loans without.  There was also concern about inflated property values as a result of the seller funded DPA programs.Moving forward the max the seller can contribute to the buyers closings costs and pre-paid items is 3% of the purchase price which has always been allowed.  The buyer will now be required to contribute the 3.5% for their the down payment.  Down payment assistance from a non-profit, employer, church or family member is still allowable and always has been.Despite these changes, FHA loans will continue to be a good option for first time home buyers.