2009 FHA Blog Part 1: FHA Down Payment requirements, declining markets

Mortgage and Lending with Fifth Third Bank NMLS #457556

With the terms "credit crunch" ,"recession", and "economic crisis" flying around us at every turn, one may ponder exactly what it takes to qualify for a mortgage right now.  With the growing list of designated declining markets around the country, qualifying for an FHA-insured mortgage may now be more important than ever. 

Before we get into the specifics of FHA qualification, let's take a look at what the declining market designation can mean to you for a Conventional loan if your area were declared declining by the private mortgage insurance companies.

**A 5% down payment requirement would instantly become 10%

**A mere rate adjustment for credit score would become an outright denial if your score happens to be less than 700. And if your credit score is less than 720 you would need an extra 2 months total housing payment (P-I-T-I) in reserves on top of the additional down payment required.

**Your debt ratio could not exceed 43% regardless of your credit score

Keep in mind this already affects the entire state of California!

Being prepared is really the 1st step.  If you have 5% of the purchase price or less for a down payment FHA will now be a superior choice for many homebuyers with all of the additional adjustments to rate for score and Loan-to-value.  Many of the FHA purchases I close in areas across the country are what I call "Conventional Fallout" from these exact conditions.  Buyers unaware of the market restrictions have written a contract to purchase and must suddenly "change gears" so to speak, when they realize Conventional loan terms are unavailable to them.  Once they are referred to me, I often must educate them that FHA is not some sort of subprime program.  It's often a superior program-offering MI rates cheaper than the Conventional PMI rates, lower fixed interest rates for maximum financing, and the ability to streamline refinance without an appraisal in the future.

Down Payment Requirement for FHA

With the changes outlined below, FHA now requires a 3.50% down payment-declining market conditions do not apply

Effective January 1, 2009, all FHA purchase transactions now require 3.50% down payment from the buyer. The old guideline was just a 3% "investment requirement" but the loan-to-value was allowed to be 97.75% in some states (if the seller were not paying all of the buyer's closing costs)where 2.25% could be applied toward down payment and .75% of the purchase price could be applied toward closing costs.  The new maximum loan-to-value is now 96.50%. The seller can pay all closing costs without affecting this.   This new policy is designed to not only mitigate risk but also provide simplification and standardization for all markets nationwide.  

Now that you know you need that 0.5% of the purchase price, keep in mind the seller can still pay up to 6% of the purchase price in closing costs and pre-paids.  If property taxes or insurance costs are fairly high in your area, keep in mind that your pre-paids may well exceed your closing costs. With a buyer's market advantage in place foreseeable for the coming year, offsetting the down payment requirement with a little extra seller contribution can often be negotiated. 

By pre-paids I am referring to:

1) The odd days interest collected from day of close to the 1st of the following month

2) Your 1st year homeowner's insurance premium

3) Your escrow reserves for property taxes and future insurance payments.

 Escrowing your taxes and insurance is a requirement on an FHA loan.  Even if you have to offer a little extra on your price, with the low fixed interest rates available you are only looking at a difference in payment of less than $6.00 per $1000 borrowed to save yourself from an extra $1000-$3000 out-of-pocket at closing.  More money to use for improvements, decorating, appliances, etc!!

Remember also that the 3.50% down payment requirement can also be met with a gift from family member(s).  My next post will cover these gift requirements as well as other asset documentation.


NEXT POST: FHA Qualification---Documentation Requirements

Potential Homebuyer

What an informative piece!  Thank you for that.  When will the next post be available?

Jan 12, 2009 08:02 PM
Nick Good
The Good Home Team with eXp Realty - McKinney, TX



If the buyer has good credit is the minimum down payment on a conventional 5% for owner occupied?  We were going to go FHA but she fell in love with a home that an investor is selling and it hasn't gone through the 90 day season.



Feb 25, 2009 06:31 AM
Kevin Weaver
Fifth Third Bank - Cincinnati, OH
an experienced mortgage professional NMLS #457556

Hi Nick, Thanks for reading! Wanted to address your question about the seasoning guidelines there....You can execute a contract before day 91 and just re-execute it on day 91 and close very shortly thereafter.....Doing that on 3 different purchases right now.  Not sure whether proposed closing date is too far removed from the 90-day season date to help you in this case.  Whether or not a 2nd appraisal is required would depend on if new sales price exceeds seller acquisition by more than 100%.  

 Dallas-Plano-Irving MSA area is not currently considered a declining market with most companies I am aware but the PMI restrictions are still very tough with many companies not offering PMI unless FICO is >740 or have third-party origination restrictions on this---that will depend on who is handling the conventional loan obviously.  If you are at 740+ the conventional 95% should be obtainable as long as debt ratios are in line.

Feb 25, 2009 07:44 AM


I have heard rumors that FHA guidlines for a downpayment requirement will change in March. Is this true to your knowledge?


Jan 27, 2010 05:43 AM
Kevin Weaver
Fifth Third Bank - Cincinnati, OH
an experienced mortgage professional NMLS #457556

Thanks for reading Rebecca,

The downpayment requirement on FHA is only changing for those borrower who have a credit score under 580.  Since 99% of the lenders out here require a 620 credit score it will not have much effect on most pre-qualified buyers. Some had feared the threshold for increased down payment would be much higher.  Keeping the 3.5% minimum downpayment is definitely crucial to keep the real estate market on the road to recovery.

-Kevin Weaver

Jan 28, 2010 12:02 AM