If you are thinking about buying your first home and using a Federal Housing Administration mortgage, make sure you have enough cash.
Because of new FHA rules, after July 1 you will need an extra $1,100 in cash for a Baltimore house that costs $75,000, compared to what you would have paid last fall.
The new rules will impose a 57 percent limit on the amount of closing costs that can be financed on mortgages backed by the FHA.
Currently, all closing costs can be financed.
The new regulations also impose an increase in the mortgage insurance premium. The Mortgage Bankers Association of America estimates that monthly insurance payments for FHA mortgages on a $75,000 house will be about $56 after July 1, up from $25. In comparison, private mortgage insurance costs about $30 per month.
Gayle Briscoe, vice president of Otis Warren Real Estate Services in Baltimore, said she's noticed an increase in the number of house shoppers without enough cash reserves. "A lot of people don't have anything saved."
To raise money, they are asking their families for money and are taking part-time jobs, working overtime and selling cosmetics, encyclopedias and jewelry door-to-door, Ms. Briscoe said.
Next month, the buyer of a $75,000 house in Baltimore will need $7,318 in cash at closing time. Previously the buyer would have needed only $6,176, according to Joyce Wood, loan officer for Inland Mortgage Corp. in Columbia.
The new regulations narrow the gap between conventional mortgages and low-cost FHA mortgages.
That means that many people who now qualify for FHA financing could opt for a conventional mortgage. Many buyers who can only marginally afford to purchase a house -- the kind of buyers FHA mortgages were designed to help -- will now be excluded from the market.
The National Association of Realtors estimates that the 57 percent limit on closing costs will eliminate 10,000 to 20,000 new homeowners from the market each year.
"Every hundred dollar increase in closing costs prices people out of the market," said Stephen Driesler, senior vice president for government affairs for the National Association of Realtors in Washington.
Hardest hit by the new rules are people who put in contracts on houses in May and June, and will not close on their houses until after July. Now they will need to come up with several hundred more dollars in closing costs, Mr. Driesler said.
The Mortgage Bankers Association estimates that for a $75,000 house, after July 1 a purchaser could finance $72,969 with the FHA, compared to $71,250 with a conventional mortgage.
FHA used to finance $73,887 before the first round of changes were enacted Feb. 17 that limited the loan amount to 97 3/4 percent of the cost of the home.
The new rules were enacted by the FHA to strengthen the mortgage program, which was in danger of folding because of rising losses.
By requiring more cash at settlement, the government hopes that fewer homeowners will default on their mortgages.