The Department of Housing and Urban Development has issued new guidance about downpayments on loans insured by the Federal Housing Administration.
The updates were outlined Friday in Mortgagee Letter 2008-23 and relate to revisions resulting from the recent passage of H.R. 3221, The Housing and Economic Recovery Act of 2008.
HUD said borrowers must make a cash downpayment of at least 3.5 percent of the purchase price. Closing costs paid by the borrower cannot be used to help meet the 3.5 percent requirement.
On purchase transactions, the maximum loan-to-value is 96.5 percent based on the lesser of the purchase price or the appraised value. The LTV, however, excludes the up front mortgage insurance premium.
On refinance transactions, the maximum LTV based on the appraised value and including the up front MIP cannot exceed 100 percent after Jan. 1, 2009.
The letter indicated that when subordinate liens are provided by a government-related entity on purchase transactions, the combined LTV can exceed 100 percent.
HUD said premium pricing can continue to be used to pay closing costs and prepaid expenses.
Closing costs paid by the seller are limited to six percent. If the seller pays more than six percent, the excess amount must be subtracted from the sales price. The loan amount will then be based on the lowered sales price.
When sellers provide other inducements, the amount of the inducement must be subtracted from the purchase price for the purpose of calculating the loan amount -- effectively increasing the required downpayment. HUD cited an example of a $218,000 sales price where a builder gave the borrower a $3,000 gift card at closing. The $3,000 was subtracted from $218,000, and the 96.5 percent LTV left the loan amount at $207,475. The downpayment worked out to $10,525.
The agency said Section 203(k), Section 203(h) for disaster victims, and FHA's Energy Efficient Mortgage programs are not affected by the LTV limit.