Thursday, December 3, 2009

FHA May Raise 3.5% Minimum Downpayment Requirement and Increase Upfront Mortgage Insurance Premiums In Some Cases

Government-backed FHA loans have been the saving grace in this tumultuous housing market. Virtually unknown during the boom-days, FHA loans now make up 38% of the SoCal mortgage market and help buyers with low credit scores and downpayments as low as 3.5% of the purchase price get into the housing market.

But now that reserves for the FHA have fallen below government-mandated levels, legislators are looking to increase the "skin" that buyers have in the game to shore up the Federal Housing Administration's own balance sheet.

Rulings may not be declared until next month, but proposals include raising downpayment requirements to 5% and increasing upfront mortgage insurance premiums (currently set at 1.75% of the purchase price) for some riskier buyers.

Government officials are playing a delicate balancing act, trying to prevent the FHA from being the next government bailout while still supporting the fragile housing recovery.

Those with low credit scores and/or low downpayments should be mindful of changes coming ahead, because the new requirements could effectively remove them from the buying pool.

Although we are strong-advocates of first-time buyers entering the housing market, we are also aware of the risks associated with less-than-qualified buyers purchasing properties with low downpayments. Nationwide, one in six FHA loans is at least 30-days delinquent.

The math is simple ... a reduction in values of even 5% would put a low-downpayment buyer "underwater". Negative-equity has been one of the key factors associated with foreclosure risk -- and at this stage in the housing bust, it's counter-intuitive to set up another generation of buyers as potential walk-away candidates.

What do you think -- should the current FHA guidelines stand -- or should they be revised with more restrictive downpayment, credit score and mortgage insurance guidelines?


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