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New law may not help FHA buyers


The recently passed bill to reduce closing costs for first-time buyers may not be as helpful for those who use FHA loans, according to some lenders.

One provision of the bill requires sellers to pay the local transfer and recordation taxes for the buyer, unless the sales contract says otherwise. Typically, buyers pay half these taxes.

But FHA rules require the buyer to pay for customary closing costs. In many cases, if a seller or lender pays for a buyer's closing costs, the amount the buyer can borrow is reduced, increasing the down payment and the money needed at closing.

John Rueckert, a senior underwriter in the Baltimore office of the Department of Housing and Urban Development, which administers FHA loans, offered this example: a $97,000 house with $3,000 in closing costs that HUD allows to be financed. If a seller paid $1,000 toward those closing costs, the FHA loan would be lowered by $950, reducing the cash needed at closing by just $50.

Many first-time buyers use FHA loans because income and down payment requirements are lower, and credit standards are more liberal.

"I don't think, in essence, that the new law is going to save an FHA buyer the type of money it's supposed to," said Dennis McCarty of Mercantile Mortgage Corp. in Catonsville.

"The FHA buyer is going to take the same amount of money that they paid [at closing] in the past and put it toward down payment. It's a better way to spend your money, but it's still spending your money."

The General Assembly earlier this month passed a bill to help lower closing costs for first-time buyers -- who often cannot afford a home because of the money needed to close the deal. For first-timers, the bill would eliminate the state transfer tax, allow them to pay taxes semiannually and require sellers to pay the buyer's local transfer and recordation taxes if the sales contract does not specify a different arrangement.

The governor is expected to sign the bill next month.

According to estimates from the Maryland Association of Realtors, the bill could save a buyer about $2,500 on a typical $130,000 house -- about the median in the Baltimore area. About half of the savings would come from sellers who agree to pay for the local transfer taxes.

Some real estate agents argue that few sellers would be willing to pay these taxes, while others insist buyers would benefit, needing less money at closing even if sellers raise the price of the house to pay for the taxes.

But FHA buyers may have a problem even if the seller is agreeable.

According to an analysis by Mr. McCarty, a buyer of a $130,000 house in Baltimore County who paid no points on the loan would only save $199 at closing if the seller agreed to pay the buyer's $1,365 share of the local taxes. The rest of the savings would be used to make a higher down payment, as FHA rules would require.

FHA loans are especially attractive to first-timers because they require a down payment of only 2.25 percent -- most lenders require at least 5 percent, though some will go as low as 3 percent.

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