FHA LOANS Could Soon Have Higher Down Payment Requirement - Fewer Potential Borrowers?
NJ CONGRESSMAN'S PROPOSAL WOULD INCREASE MINIMUM DOWN TO 5% - NO CLOSING COSTS IN LOAN AMOUNT!
It's no secret that Loan Underwriting Standards for all Mortgage Loans - Conventional, and Government-Backed - have become much more stringent in recent months. Across the board, minimum down payments, fees, and minimum acceptable FICO Credit Scores have increased.
Three years ago, borrowers with challenged credit and low down payment usually had multiple choices to finance their new home or condo. Today, for many, there is only one such choice - an FHA-backed loan.
As reported by Chicago Tribune Real Estate Writer Mary Ellen Podmolik in last Friday's Trib, FHA Loans now represent roughly 25% of all new home loans - a near five-time gain from the 5.5% share they had as recently as early 2007. Within the last two years, minimum down payment on an FHA Home Loan increased to 3.5%, from the earlier 3.0%. Minimum FICO Credit Score to now qualify - 620, up from as low as 580 earlier in 2009.
Now, a proposal by U.S. Congressmen Scott Garnett, a New Jersey Republican, would increase the minimum down payment on an FHA Loan to 5.0%. Further, under his proposal, closing costs - sometimes as high a 6% of the loan amount - could not be rolled in to the mortgage amount.
Garnett says he does not want to hamper home ownership by those with little down - only protect the FHA. Due to high demand for these loans, coupled with still-increasing rates of mortgage default, FHA Cash Reserves have fallen below the minimum levels required by Congress. Further stress on the FHA, he contends, could ultimately result in a taxpayer bailout, if required to stabilize their programs.
He further states that insisting on higher initial equity could reduce the number of loan defaults, as those with greater equity in their homes might be less likely to fall behind on their house payments.
The down payment increase seems as only a slight change, but, as home buyers and Real Estate Practitioners have seen in 2009, often the slightest tightening in lending requirements sends many buyers scurrying to the sidelines. Also, removing the ability to finance closing costs could further hamper those with little initial cash for a down payment, and, in some cases, prevent them from moving forward on a home purchase.
DEAN MOSS & DEAN'S TEAM CHICAGO
