Loan Modification

Increase Shot Down: FHA Down Payment Remains 3.5%

By Gina Pogol

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.

Full post as published by FHA Mortgage Guide on April 28, 2010 (boomark / email).