SHOULD FHA INCREASE MINIMUM DOWN PAYMENT?
There is a plan being floated in the senate to increase the down payment for FHA loans to a minimum 5%. The concern is that the FHA's reserves have gotten dangerously low following the wave of foreclosures at the height of the housing crisis
FHA has undergone a lot of changes over the last year or so. When the ill conceived HVCC ruling took effect for appraisals it pushed a lot of loans to the FHA pipeline because for a time FHA was exempt from having to order appraisals blindly. During this time, FHA was the go to loan and was still offering loans with low down payments and low mortgage insurance. No doubt there were loans done during this period when conventional loans were tightening up that should not have been done.
The question is "should FHA increase the minimum down payment?" now? We've seen FHA increase the down payment from 2.75% to 3.5%. We've seen the MIP go from .55% to as high as 1.10%. At the same time the up front mortgage insurance went down to 1% from 2.25%. There have been several changes; it seems every few months there is a little tweaking going on.
Some of the changes referenced above were to keep FHA from being the only game in town.
When considering increasing the down payment, FHA's Stevens says they are already charging 10% down for lower credit scores FHA loans. So is that enough of an answer? Does that mean FHA should not increase the minimum down payment again?
How much would an additional 1.5% down payment mean? If a borrower put down 5% then would it be safe to say that borrower is much less likely to default than if he put down 3.5%?
I look at this two ways. One is if a borrower can put down 3.5%, is it so much to ASK for 5%? If that 1.5% made or broke the borrower, then perhaps he should not be buying anyway.
On the flip side how much would 1.5% more even matter. Is a borrower more likely to stay in a home with a 5% down vs 3.5%?
Opponents are saying that the extra down payment would exclude many buyers at a time when the housing market is continuing to slide. They think it would be a deterrent to recovery.
Proponents are saying the extra down will make a borrower more vested, less likely to default and FHA needs the money.
In my Kentucky market, the extra 1.5% is not significant; we don't live in a state where FHA loans are several hundred thousand dollars. Our FHA loans tend to be smaller, so I don't see it as a deal breaker if a 5% minimum down payment is required.
On the other hand, I wonder when we've seen so many changes to FHA if they are allowing enough time between changes to see how the changes have worked so far. Also, with all the extra effort being applied to the underwriting process, maybe we are doing enough already to assure the majority of the loans are good. After all isn't FHA supposed to be for the under served?
