House Votes to Keep FHA Down Payments at 3.5%

• April 27th 2010

by Mark Wellborn

The House Financial Services Committee voted on Tuesday to keep the minimum down payments on loans backed by the Federal Housing Administration (FHA) at 3.5%. The amendment on the table proposed raising the down payment to 5%.

While the news is good for those people who plan to take advantage of the loan, it does not bode well for the FHA’s coffers.

In January, the Federal Housing Administration (FHA) introduced several changes to its mortgage products as the rise in popularity of FHA loans has resulted in a steady drop in the agency’s reserves. (Estimates are that up to 50 percent of new homebuyers are opting for the low down payment loan.) Below are a few of the steps that the administration is taking to replenish its reserves as well as offset exposure to risky homebuyers:

1. The upfront insurance premium that borrowers pay at closing will be increased from 1.75 percent to 2.25 percent of the overall value of the loan.
2. In a measure that will allow the FHA to better balance its risk among a wide variety of borrowers, the amount of money required as a down payment for borrowers with low credit scores will be increased. While borrowers with at least a 580 FICO score will still be able to qualify for a 3.5 percent down payment, those with scores lower than 580 must put up a 10 percent down payment. This change will go into effect in early summer.
3. The amount of money that sellers can kick in for closing costs will be reduced. Currently, the FHA allows sellers to pay closing costs up to 6 percent of the sale price of the home. The change will reduce the cap to 3 percent. It has been speculated that the 6 percent concession exposes the FHA to excess risk by creating incentives to inflate a home’s appraised value. The reduction will bring the FHA in line with industry standards that already exist for seller-paid closing costs. This change will go into effect in early summer.

This article originally published at https://dc.urbanturf.com/articles/blog/house_votes_to_keep_fha_down_payments_at_3.5/2014.