The times they are a changin. HUD Secretary Sean Donovan is asking congress to raise the minimum down payment for FHA loans from 3.5% to 5%. Mr. Donovan stated that buyers need to have a stronger equity position in the homes they are buying. This request comes as the FHA loan guarantee fund has slipped below its mandated 2% level. Representative Scott Garrett (R - NJ) who is the sponsor of a House Bill, The FHA Taxpayer Protection Act 2009 which would raise the minimum down payment feels the increase would help make home buyers more committed.
Estimates are that 75% of first time home buyers are using FHA loans to finance the purchase of their new home. Approximately 30% of the homes in the US are secured by FHA loans. Not too long ago FHA was losing their market share to other types of loans. Due the real esate collapse and the mortgage meltdown FHA loans are quickly gaining market share every month. This dramatic increase in FHA loans has put a higher risk of loans defaulting. By increasing the requirements FHA is hoping to weed out people who are who might notbeable to keep up with their payments.
HUD Secretary Sean Donovan gave three options for increasing the amount of money home buyers have to pay in upfront.
1. Raise the minimum down payment from 3.5% to 5%
2. Raise the upfront mortgage insurance premium from 1.75% to 3%
3. Decrease the allowable seller concessions from 6% to 3%
Unfortunately if these changes are made I believe it will definitely hurt the housing market. Some buyers are already having a hard time coming up with the current 3.5% down payment that is required. We already have lenders increasing the minimum credit score required to obtain an FHA loan. I think that the elimination of down payment assistance combined with the increased credit score requirement are already making a big impact on the quality of FHA borrowers. Many of the loans that are in default were from a time when there was no minimum score requirement and seller assisted down payments were allowed. The biggest problem I foresee right now is unemployment. You can require a higher down payment, higher credit scores, more cash reserves and any other add on criteria. If a homeowner loses their job for any length of time none of these requirements is going to protect FHA.
The bottomline is if you have a perfect borrower with no money coming in then they will not be able to make their monthly payment. Will these changes help to stem the tide of defaults? As I stated above I think the changes HUD has already made will help to protect the future of FHA loans.
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