Changes to Down Payment Rules on FHA Home Loans

As the Federal Housing Administration continues to struggle with funding issues, additional changes to the FHA home loan program are being instituted.

Last month, we wrote about some proposed changes to the FHA home loan guidelines that would require larger down payments across the board. That particular proposal is still with the House Committee on Financial Services. So there’s nothing new to report on that front. Earlier this week, however, the Department of Housing and Urban Development (HUD) announced some other changes to FHA loan guidelines.

Significant Changes Include the Following:

The FHA will increase the mortgage insurance premium (MIP) required on all home loans issued through this program. This premium is one of the components that are collectively referred to as closing costs. Starting this spring, the MIP will increase from 1.75% to 2.25%. This will increase the total amount of closing costs for home buyers who use FHA loans to finance their home purchase.

Other FHA changes relate to the borrower’s FICO credit score. In short, if a borrower has a FICO score below 580, they will be required to make a larger down payment on the loan — a down payment of 10%. Buyers with scores above 580 can put as little as 3.5% down. The FHA has made this change to protect themselves from the higher lending risks that are associated with subprime (bad credit) borrowers.

They have also reduced the amount of seller concessions from 6% to 3%. This means sellers will not be allowed to contribute as much money toward the buyer’s closing costs (when the FHA loan is being used).

HUD Secretary Shaun Donovan said that additional details would be released before the end of January. We will update this story as soon as these details are available.

What It Means to Home Buyers

The most significant change is the new down-payment requirement for borrowers with less-than-ideal credit. But this is also something that home buyers can control, by taking proactive steps to improve their credit scores. The difference between a 3.5% and 10% down payment is significant, especially for a first-time buyer who doesn’t have a lot of cash to put down.

On a $200,000 mortgage loan, the difference stacks up this way:

  • 10% down payment = $20,000 (due at closing)
  • 3.5% down payment = $7,000

If this home buyer had a FICO score below the new 580 cutoff, he or she would have to bring an extra $13,000 to the table on closing day. If that doesn’t motivate you to improve your credit, then nothing will.