For real estate investors who cater to the smaller property, first time home buyer crowd, there’s some good news.  Actually, catering to this market has been good news for quite some time with a side benefit of providing a spark to the first time home buyer market.

FHA changes

But the good news is getting better. The financing program of choice for the majority of first time home buyers is the FHA mortgage loan. The only other program that might be better in terms of lower down payment and reduced closing costs is the VA loan, but those are reserved for those who have served in the armed forces. Otherwise, FHA is by far the first-timers preference.

The FHA mortgage program requires a down payment but only 3.5% of the sales price. In addition, the seller or the lender can assist with closing costs and relatives can contribute all or part of the buyer’s required funds. The drawback with FHA mortgages has been the pricey mortgage insurance required for FHA loans. FHA loans have an upfront mortgage insurance premium and an annual premium for the life of the loan. The upfront premium amount is 1.75% of the sales price of the home and the annual premium 1.35%. On a $200,000 loan, that’s an additional one-time $3,500 and $2,700 annual cost. The annual premium is paid monthly. These premiums were adjusted upward over the past few years to help FHA recover from the losses incurred during the housing debacle of the last decade.

However, FHA has just announced a reduction in the annual premium by almost half, to 0.85% from 1.35%. That’s a change from $2,700 per year to $1,700 in this example, or $225 to $141. These lower premiums help more potential buyers finance their first home, widening the pool of potential buyers for investors. These FHA changes aren’t designed for investors, they’re designed for the buyers of homes investors put on the market.