FHA-backed Loan Requirements Are Changing

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Should FHA-backed loan insurance require 5% down from borrowers?

The Federal Housing Administration (FHA) is afraid that any increase in minimum down-payments for FHA-backed loans will cause a double-dip decline in housing prices. So the question is: what’s the minimum down payment a buyer needs to make for their loan to be insured by the Federal government?

Right now it’s 3.5%.

Representative Scott Garrett from New Jersey wants it to be 5%.

FHA-backed Loans

Commissioner David Stevens will testify this week before Congress that would drop FHA-backed loans by 40%, meaning 300,000 less home sales. Defaulted loans on the FHA’s books have been rising for the last three years, and if home prices keep going down it’s taxpayers that will foot the bill.

And what is the FHA planning to do instead of raising down payment requirements? Raise the upfront insurance premium for borrowers, reduce how much sellers can assist buyers in paying for closing costs, and increase minimum down payments to 10% for borrowers with a credit score of 580 or less. They also want greater authority from Congress to hold lenders accountable for bad loans- and eject lenders that it says aren’t living up to its standards. That seems pretty reasonable for an insurance company- and all of these proposed changes are projected to generate $4.1 billion for the FHA for the coming year.

The final question is whether our end goal is to be making and insuring as many home loans as possible or making and insuring loans to a smaller but more financially secure group of borrowers?

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