You will not need a huge pile of money for an FHA down payment
In recent years, the FHA has become a vital source of mortgages as private investors have fled the mortgage market. Low current mortgage rates and low down payment requirements make loans insured by the FHA especially attractive to first time home buyers. As much as 80 percent of FHA business is with first time home buyers.
Yesterday the House Financial Services Committee voted down a measure that would have raised the required down payment for an FHA mortgage from 3.5 percent to 5 percent. This is great news for borrowers who do not have a lot of money for a down payment. If the down payment were to be raised, hundreds of thousands of borrowers would be unable to get an FHA mortgage. The rejected bill would have stopped sellers from putting proceeds from the sale toward a buyer’s closing cost.
The bill was introduced because cash reserves at the FHA are running very low. The FHA is required by law to maintain capital reserves of at least 2 percent of the total value of the mortgages it insures. The high number of defaults brought on by the recession have depleted FHA reserves. Estimates have FHA capital reserves around 0.5 percent. Low cash reserves mean that additional defaults could effectively bankrupt the program.
The Committee did approve a measure that would allow the FHA to raise its annual mortgage insurance premiums. Currently the mortgage insurance premium is 0.55 percent. The agency intends to gradually increase the premium to 1.5 percent.
The FHA also wants to raise minimum down payments to 10 percent for borrowers with credit scores below 580. The FHA contends that these changes will bring capital reserves back to 2 percent relatively quickly. The Congressional Budget Office claims these changes alone will not return cash reserves to the legally required minimum.
The bill still needs to be approved by the House of Representatives and the Senate in order to be passed into law.
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