Increase Shot Down: FHA Down Payment Remains 3.5%

by Gina Pogol
April 28th, 2010

Yesterday the House Financial Services Committee defeated a proposed measure that would have increased the minimum down payment for an FHA mortgage from 3.5% to 5%. This is good news for FHA’s primary market: borrowers who can afford a mortgage payment but do not have a lot of cash to put down on a house.  If the down payment requirement were raised, it would create an insurmountable obstacle for many potential homeowners, those for whom even 3.5% is a stretch.

The rejected provision would also have prohibited property sellers from making any contributions towards buyers’ closing costs. The proposed FHA seller contribution limits seem somewhat unfair, as borrowers getting conventional loans are allowed 3% in seller concessions.

The bill was conceived as a solution to increase FHA‘s cash reserves, which are running very low. FHA is required by law to maintain capital reserves of at least 2% of the total value of the mortgages it insures.  The high number of recession-era mortgage defaults has seriously depleted FHA reserves, to the point that analysts estimate it has only 0.5% left. That’s only a quarter of what is required by law. Some lawmakers have even suggested that FHA be enjoined from insuring any new loans until it tops up its reserves, a solution that most think would be disastrous for the housing recovery and the economy.

But FHA still needs to raise money somehow.

The Committee did approve a measure that would allow the FHA to raise its annual mortgage insurance premiums.  Currently the maximum mortgage insurance premium is 0.55%.  The agency intends to gradually increase the premium to 1.5%.

In addition, FHA wants to raise minimum down payments to 10% for borrowers with credit scores below 580.  The agency asserts that these changes will bring capital reserves back to 2% fairly soon, but the Congressional Budget Office is skeptical.

The bill must be approved by the House of Representatives and the Senate in order to be passed into law.

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This entry was posted on Wednesday, April 28th, 2010 at 9:25 am 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.

One Response to “Increase Shot Down: FHA Down Payment Remains 3.5%”

  1. rob aubrey Says:

    Brilliant I say, let’s price buyers out of the market that will surely increase revenue to FHA.

    I am just blown away by Gov bureaucrats, they clearly do not get how economics work.

    I don’t disagree with the 580 10% thinking, although 10% might be to high. Maybe 5% and a bump in the UPMIF.

    But if you are going to play that then how about rewarding the 740 and above crowd with a lessor down. They have demonstrated that they pay their bills, then may cause a lot more people to go that route.

    There’s an idea causing more people with good credit, that might increase the revenue and at the same time decrease FHA’s insurance payouts.

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