Is 3.5% in Home Equity Too Risky for the FHA?

by Heindrick So
November 24th, 2008

By January 1st 2009, FHA down payment requirements are increasing to 3.5% from our current 3% requirement. As for the Hope for Homeowners program, lenders have recently been given a break and are only required to write down existing loans to 96.5% LTV.

In both cases, these loans give FHA borrowers roughly 3.5 percent in home equity. It’s definitely not the same as buying a home with no money down, but the close percentages have some people thinking otherwise

FHA Offers More Than Low Down Payments
Sure, there are a number of borrowers who prefer FHA loans simply because of the low down payments. But, given our current credit markets, FHA loans still offer many more advantages to consumers than the initial low down payment. Specifically, individuals with lower than excellent credit have found that FHA loans remain quite attractive.  Now, here’s where many people draw a correlation between FHA and subprime loans. You hear low credit and low down payment in the same sentence, and we all think subprime. But, the key difference separating FHA from the subprime garbage is the way in which FHA loans are issued. 

You won’t find any prepayment penalties trapping FHA borrowers, nor will you find any absurd adjustable rate mortgages here. And although the qualifying ratios for FHA loans (31%/43%) are looser than conventional loans (28%/36%), FHA always requires proper income documentation. Not to mention, FHA loans make all this available without adding significant hits to the consumers bottom line interest rate. 

Considering FHA?
If you’ve been hearing all the news about FHA, you’ve probably heard these catch phrases being thrown around the media and advertisements. But the truth remains that FHA is much more than low down payments and low credit borrowers.

So if you’re looking to move into a home with only 3.5% down and no strings attached, you’d better look elsewhere. If that were really the case, then yes, FHA loans would be a serious cause for concern. Fortunately, FHA loans still utilize common sense underwriting to ensure that their borrowers can actually afford to pay back their loans.

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This entry was posted on Monday, November 24th, 2008 at 2:32 pm and is filed under . You can follow any responses to this entry through the RSS 2.0 feed. You can skip to the end and leave a response. Pinging is currently not allowed.

3 Responses to “Is 3.5% in Home Equity Too Risky for the FHA?”

  1. Carl Pruitt Says:


    Thanks for highlighting that big difference between FHA and subprime. I am so sick of hearing FHA referred to as the new subprime.

    Subprime never seemed to apply common sense to the underwriting process. They just wanted the borrower to fit their matix regardless of the reasons for the credit problems or whether they had resolved.

    As to the down payment I originated as many loans as I could handle when borrowers had to put down just under 5%. 3.5% should present no problem to buyers or loan officers once they adjust to it.

    The next step for FHA, I believe, is to get more staff into their lender approval and compliance divisions to prevent the crooks from taking advantage of the FHA system and ruining it.

    Carl Pruitt

  2. Dominick Says:

    FHA Downpayment increases to 3.5% after Jan 1, what if you ratified in December 08, but don’t close till 1/12/09, would you still qualify for the 3% down payment???

  3. Heindrick So Says:

    It realy depends on the actual FHA lender you are working with. I’ve heard of some lenders who’ve been requiring the 3.5% already, and some who will continue to fund so long as your case number was issued before Dec 31, 2008. Given the timeline, I’d say prepare for the worst case scenario and save an extra .5% for your down payment.

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