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Why a Mortgage May Cost You More in 2014

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The Federal Housing Administration recently announced a reduction in high-cost area loan limits. This reduction comes in accordance with the government’s ongoing effort to retreat from the housing market. Rewind the clock back to 2008, when financial markets were significantly depressed, the economy was on the verge of recession — enter the FHA as the new outlet to support a frail housing sector.

Since then, unemployment has dropped, job growth, while still bleak, is improving, and real estate is in demand. The FHA has accomplished its goal of helping to boost the housing market. Now the government wants to minimize its exposure to bigger loans.

The FHA loan limit reduction will affect home buyers in higher-end properties. For example, if you take Sonoma County, Calif., the maximum new FHA loan limit in January will be reduced to $520,950 from $662,500. Homebuyers who once could buy with less capital will now have to invest more cash into the deal or buy less house.

If you’re looking to buy a house but haven’t yet, here’s what to expect in 2014.

1. Your Mortgage Limits Will Be Reduced

Most counties will see the maximum loan limits decrease, on average, by $67,250 beginning January 2014.

2. You’ll See Jumbo Mortgages Again

A jumbo mortgage loan typically has tighter qualifying restrictions in terms of credit history and debt ratio requirements than its FHA loan counterpart. For example, a buyer with tarnished credit can use an FHA loan to purchase a home three years out of the short sale or foreclosure or two years after a Chapter 7 bankruptcy. But with many jumbos, the standard seven years will apply in most cases. One exception to this is if you have 30% down, a lender will consider granting a jumbo loan to a borrower two years after they’ve had a short sale.

3. You’ll Need to Get Your Credit Score in Order

You’ll need at least a 700 credit score to play ball. The best terms will go to those with 740 scores or better. (Before you even start shopping for a home, it’s important to know what shape your credit is in. There are many ways to check your credit scores, including Credit.com’s Credit Report Card, which is a free tool that shows you your credit scores and an overview of your credit report so you know which aspects of your credit you need to work on to get a higher score.)

4. You Might Need a 20% Down Payment

No longer will homebuyers on the higher-end market be able to purchase a home with less than 20% down if the loan is not conforming high balance or FHA. In other words, 20% down is going to be the new normal in most markets for majority buyers. Many investors simply do not allow for mortgage insurance on large scale loan sizes.

5. You’ll Need More Gift Money

Brought on by the FHA’s transition out of the mortgage market, and the need for more money down, buyers may have to turn to gift money as a source for the down payment needed to buy the home. But if you do, be ready to have these monies documented and sourced from all the parties.

6. You’ll Need Reserves

Lenders look at reserves as a cushion to make future mortgage payments. While the FHA does not have a reserve requirement, jumbo loans typically do. You’ll need six months of mortgage payments in the bank post-closing escrow.

7. You Might Have to Buy Less House

This could end up being the unfortunate fact for many buyers in the market who have substantial income but not enough down payment and/or cash to seal the deal. They may have to scale back the purchase price and loan in order to meet the maximum loan limit criteria in your area.

Keep in mind, the FHA would not reduce the loan limits if there was not financial justification to do so. Home prices have risen in 2013, and future home prices show promise for strong improvement, which can be directly attributed to an improving economy — as the unemployment rate drops and new job creation increases.

In essence, people buy homes when they’re feeling confident about their employment and they have the income necessary and the confidence to do so. While these changes will inevitably affect a percentage of the hom buyers in the market, this is a sign of an overall improving economy which points to good news for home equity and subsequent home sales.

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