New FHA Regulations and the Impact on the Jumbo Loan Market

The new FHA standards could have potentially damaging effects on large loans. However, that doesn’t mean these loans will go away. While government restrictions and banking fears have tightened credit, people are still buying homes and finding ways to finance their home purchases. Lenders that are off the beaten track (such as local banks) and banks that are not located on Wall Street are great potential sources for jumbo and super jumbo loans.

Homebuyer Challenges

The main headache for homebuyers is that FHA loans open the door to lower-priced homes, condos, and townhomes, but really make it harder for homes that are outside the price threshold set by government agencies.

With an FHA loan, a homebuyer can make a down payment of just 3.5 percent, instead of the typical 10 or 20 percent, but must purchase mortgage insurance. With the new guidelines for FHA-backed mortgages, higher insurance premiums are required, as are better credit scores and a reduction in seller’s concessions. For buyers with good credit (credit score of 580 or better), the down payment on an FHA loan will continue to be 3.5 percent. There are cost increases as the cost of mortgage insurance increased from 1.75 percent to 2.25 percent of the loan; This means that for a $200,000 loan, the cost increase will be at least $1,000.

Impact on the Mortgage Market

Since the economic collapse, many first-time homebuyers turned to FHA loans because they offered favorable interest rates on loans below a certain dollar amount. As the lending industry fell apart, it offered some homebuyers the opportunity to find available lines of credit. It also opened up loans for people who may not have the cash on hand to take out a loan from a major bank like Bank of America or Wells Fargo.

However, as the lending industry returned to normal, the growing reliance on FHA loans created some problems within the lending world. For example, for many people, the houses they are interested in buying are too expensive for an FHA loan. With a threshold ranging from $400,000 to just over $700,000, quite a few homes fall outside this price range, leaving many potential home buyers scrambling to find a lender.

Jumbo Loans

With many banks already very reluctant to lend money, some types of loans, such as jumbo mortgages, fell by the wayside. FHA loans opened the door for low-income people and people with less cash on hand to get loans, but they also interfered with lending for more expensive properties. Jumbo mortgage lenders are still in business, but you have to look further to find a good one.