Rumors are circulating that the Department of Housing and Urban Development plans to increase the down-payment requirement for FHA loans. The move would increase the minimum down payment from 3.5% to 5% of the purchase price. Actually, it’s an old rumor that has been rejuvenated. People were speculating on this at the end of 2009 as well.
Fact: According to HUD, there are currently no plans on the table to raise the FHA down payment to 5%. Currently is the key word there.
Here’s how these rumors usually get started. Someone from the mortgage industry will say something like: “The way things are going now, I wouldn’t be surprised if the FHA raised their minimum down payment to 5% in the near future.” While it’s true the FHA has made some changes to boost its capital reserves, higher down payments are not one of them. Not yet, anyway.
Sometimes the idea will actually come from a reliable source. That may be the case this time around. There have been reports that the Obama administration is proposing a down-payment increase to Congress (FHA changes require congressional review).
Regardless of the source, it doesn’t take long for the Internet rumor mill to spin it. It’s the real estate equivalent of the whisper game played by kindergartners. I recently encountered a real estate agent’s blog that warned home buyers to “act quickly” because FHA down payments are “rising as we speak.” Some agents will say anything to give shock therapy to a sluggish market.
FHA Fact vs. Fiction
HUD spokesman Lemar Wooley recently said the housing agency has no plans to increase the down payment requirement on FHA home loans. And this is hardly a secretive group we’re talking about. They’re a government agency, and all major policy changes have to go through Congress. So a higher down payment would require a vote in both the House and Senate. It would need to be proposed and outlined long before it would actually take effect. These things don’t happen under the radar. And the fact that people have been kicking this idea around since 2009 should be taken into account.
But then there’s this from the Washington Post:
Borrowers looking to take out FHA loans — the mortgage of choice in recent years for cash-strapped borrowers — could see the minimum down payment requirements rise from 3.5 percent, the administration said in a report to Congress last month.
When it comes to the FHA’s policies, changes can come from different directions. They can be proposed by officials within the Federal Housing Administration, and then reviewed / approved by Congress. Or they can be proposed by the president and his advisors, and sent to Congress for consideration. So it’s possible that, while Lemar Wooley is speaking the truth about having no plans to raise down payments, those plans are being made “above his pay grade.”
Frankly, I wouldn’t be surprised to see higher down payments for FHA loans in the near future. It would fall in line with the Obama administration’s goal of reducing the government’s role in housing. This includes plans to phase out Fannie Mae and Freddie Mac over the next few years. There has even been talk of making a 10% down payment the new norm for conventional mortgage loans (those that are not insured by the government). But even this proposal is facing a lot of push-back from consumer groups and smaller lenders.
Credit Score Need for the 3.5% Down Payment
It’s worth noting at this point that the FHA has certain requirements for the 3.5% down-payment program. Borrowers will need a FICO credit score of 580 or higher to qualify for the 3.5% level. Home buyers with scores below 580 will be required to put down at least 10% of the purchase price.
Of course, mortgage lenders often impose their own requirements on top of these. The industry term for this is overlays. Some lenders still require a credit score of 620 or higher for FHA loans, which makes the 580 cutoff sort of a moot point.
Changes We Know Are Coming
While the down payment increase is theoretical at this point, there are some forthcoming changes to the FHA loan program. Starting in April of this year, borrowers will have to pay more in mortgage insurance when using the FHA program. The annual premium will go up by a quarter of a percentage point. This is one of two insurance premiums the borrower must pay. The upfront premium (due at closing) will remain the same. The annual premium (that gets added onto the mortgage payment) is the one rising in April.
We could also see lower limits for FHA loans, starting around October 2011. That’s when the current loan limit of $729,750 expires. It has been proposed that the limit be dropped to $625,500. The Obama administration is on board with this change, and Congress is expected to back it without much drama. The idea here is simple. The FHA loan program was originally intended for lower-income borrowers — responsible borrowers who don’t have a lot of money for a down payment. Which begs the question: What kind of lower-income borrower buys a home in the $700,000 range?
Some critics argue the government should go further, lowering the FHA loan limits to $500,000 or less. For now though, it’s baby steps. October will likely bring a decrease from $729,750 to $625,500.
Are higher down payments next on the agenda? Time will tell.