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Higher FHA Down Payments On The Way?

December 18th, 2009 categories: Buying, Loans / Financing

If you’re one of those hopeful home buyers in Benicia, Vallejo or the rest of Solano County who’s scraped together just enough cash to come up with the minimum FHA down payment and are FHA Down Payment Going Uprelying on a seller’s closing cost credit to cover most everything else, you might want to reach for the Tums before reading the rest of this post.

That’s because HUD Secretary Shaun Donovan recently told Congress that FHA is considering increasing the minimum down payment and reducing how much a seller can credit to the buyer.

Up until this year, FHA loans had been the ugly stepchild of the mortgage industry for most of this decade — at least here in Solano County and most of the rest of the high-priced Bay Area.

In the interest of jump-starting the economy, the loan limits for FHA loans were raised substantially for 2008 and 2009.

And almost overnight, that turned this almost-forgotten loan into one that 80-90% of all first-time home buyers suddenly turned to.

So FHA’s market share has exploded over the last 18 months or so. Pull QuoteAnd that added exposure, combined with losses FHA absorbed from defaults by existing borrowers has put FHA in a precarious cash-reserve situation.

And that’s what prompted Sec’y Donovan to tell Congress that FHA might very well need to increase the down payment and reduce the amount a seller can contribute — as a way of weeding out the riskiest borrowers and minimizing FHA’s exposure to future losses.

If Donovan’s ideas are put into action, FHA would:

1. Raise the minimum down payment from 3.5% to 5%; and,
2. Reduce the allowable seller contribution from 6% to 3%
3. Increase the minimum credit score (to “what” is still unknown)

Both of these would require FHA borrowers to bring more money to the table. And that could put a serious kink in the armor of many a first-time buyer.

Take Bill and Lisa, our hypothetical buyers. They’ve socked away $10,000 over the past few years and have been waiting patiently through multiple-offer after multiple-offer in hopes of getting into contract on their first home. They both have great credit, good stable jobs, and can easily afford a $200,000 home.

The down payment on that home at 3.5% would be  $7,000. Add in another $9,500 in closing costs and Bill and Lisa need to come up with almost $17,000 to buy their first home.

Their plan is to put the mandatory $7,000 down and save their remaining $3,000 to cover moving expenses and things like painting or landscaping that might be necessary (particularly if they buy property that needs some immediate TLC).

So they plan to ask the seller to credit them $9,500. That works out to a 4.75% seller credit. No problem, since the seller can contribute up to 6%.

But let’s look at the pickle Bill and Lisa would be in if the proposed FHA changes are adopted.

Their minimum down payment would jump from $7,000 to $10,000, which means they’d need to come up with $19,500.

But the maximum seller credit would now be $6,000. That would put them $3,500 short of what they need to close escrow.

As you might guess, Bill and Lisa wouldn’t be very happy campers if the FHA changes went through.

And I suspect there are thousands of Bill’s and Lisa’s out there right now. I personally have clients who would be critically impacted by such a change.

Now before you reach for another Tums, remember that nothing’s been decided yet.

And I’m sure that there will be plenty of debate before any decisions are made.

For more details, see the Wall Street Journal’s coverage of Sec’y Donovan’s recent testimony before Congress.

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This entry was posted on Friday, December 18th, 2009 at 9:03 am and is filed under Buying, Loans / Financing. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.

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