FHA mortgage down payment requirements and housing market : Bad Credit Advisor

FHA mortgage down payment requirements and housing market

The press is abuzz over the Tuesday's announcement by the U.S. Federal Housing Administration, the FHA, that it will raise the requirements for the minimum FHA mortgage down payment, required to secure an FHA backed loan for less creditworthy borrowers as part of a series of steps to shore up its finances. The fear is that the new requirement will be impossible to meet for many potential home buyers and seriously damage recovery since the FHA mortgage loans have been basically keeping the housing market alive, albeit barely.

So what exactly are the new FHA down payment requirements? The borrowers with credit scores below 580 will be required to put at least 10% down in order to obtain the FHA mortgage. Everyone with credit score over 580 will still be able to put only 3.5%. The other increase if you are under 580, will come in the form of FHA required upfront mortgage insurance premium (MIP), which is paid by the borrower when the loan is made and is currently 1.75% of the mortgage amount, but will go to 2.25%.

Will these higher FHA down payment and MIP requirements really affect FHA mortgage volume, which is now exceeding an annual rate of 3 million loans? I seriously doubt this. But regardless, one has to understand that some 20% of newly issued FHA mortgage loans are at some stages of default. Newly means those guaranteed after the housing bubble burst. In addition, the FHA needs money. Its capital reserves is down to just 0.53% of the value of the thousands of home mortgages it insures, well below the 2% required by law and way down from 3% in 2008. I wrote about some of upcoming mortgage debacle in Getting mortgage in 2010 - how to get the best mortgage.

But there are two key points that we must address. First, very few borrowers with credit scores below 580 were getting FHA mortgage loans to begin with. While the FHA has always had few provisions for those with bad credit, banks have not generally made too many FHA backed loans to borrower whose credit scores are below 620. This is why in my opinion, these new FHA mortgage down payment requirements won't make much of negative effect on housing market.
Second, our government will almost certainly act to offset any higher requirements by giving more incentives like higher home buyers tax credits and other perks.

Considering that most of homes that are being bought with FHA backed mortgage loans are priced under $250,000, someone buying $200,000 home will how have to come up with $20,000 down payment instead of $7,000 and pay a $1,000 more in upfront MIP. That is significant chunk of money, but again, how many borrowers will be affected? I do not think that many with credit scores that low are and will be buying. Those who will be, may seek certain FHA allowable seller concessions like up to 6% seller credit, or simply save more money and raise credit scores. Which leads us to several quite relevant pages - fix your credit and stop fretting about FHA mortgage down payment requirements,

Raise credit score fast 50 points
Fix credit score fast - quick ways to increase credit scores
Repair credit score quickly for the right type of loan
Self credit repair - do it yourself
FHA loan requirements and qualifications
Credit score for FHA loan

Also, in another effort to help rebuild reserves, the FHA will be seeking congressional approval to allow it to raise annual mortgage insurance premiums, paid out by all FHA mortgage holders over the life of the loan, above the current maximum of 0.55%.

Wed Jan 20, 2010 10:01AM by Tony | More in Mortgage | Comments (0)

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