FHA commissioner David Stevens made news last week when he announced that FHA would keep the minimum down payment at its current 3.5%. FHA critics have called for an increase in the minimum down payment up to 5%, but Commissioner Stevens told a congressional committee that raising the down payment would take out at least 300,000 buyers from the market, and mean a 40% reduction in loans, endangering the fragile housing recovery and putting the economy at risk. This statement wasn’t totally unexpected, but it is good news for anyone in the housing industry, and anyone who either owns a home or is in the market to buy a home.

FHA mortgages are one of the most popular loans on the market, accounting for about 40% of the overall mortgage market. Most of the home buyers now are first time home buyers who don’t have a big down payment saved up, and a good portion of the rest are move up buyers who ended up with less equity than they were hoping for. Coming up with the down payment has always been the biggest obstacle to buying a home, and for those who don’t have a lot saved up FHA is about the only game in town. But there has been a lot of hand wringing over the last year as critics of the program warned that FHA was the new version of Sub Prime, and a disaster waiting to happen. It’s true that FHA defaults are on the rise (still much lower than conventional defaults) but this is a function of the problems in the housing market and a high unemployment rate – not an indictment of the FHA program. I never understood why an increase in the required down payment would make the program that much safer. If home prices continue to fall, an extra one and a half or two percent increase in the down payment won’t make much of a difference. If someone loses their job the extra down payment won’t help them if they don’t have the income to pay the mortgage. Commissioner Steven’s has got it right. The people who buy with FHA have to go through the same underwriting process as anyone else, and the skin they have in the game is substantial compared to their means. Taking these buyers out of the market hurts not only them, but everyone else.

FHA upfront mortgage insurance rate increases in April

FHA doesn’t lend the money directly to home buyers; it acts as a mortgage insurance fund, charging fees to the borrower to protect the lenders from losses. Borrowers pay this mortgage insurance in two ways, an upfront payment that is usually financed into the loan amount, and a monthly mortgage insurance that goes on for at least 5 years. This money goes into the fund, and is used to pay off the lender if an FHA loan defaults. The FHA critics had one thing right. It is crucial to keep the program solvent and running. HUD still has a good margin the FHA reserve fund, and FHA has been self funded for the entire life of the program. But to make sure that they stay above water and don’t need a bailout, even if the economy worsens and the housing market dips again, they have decided to increase the required upfront mortgage insurance. The upfront mortgage insurance premium is now 1.75%. As of April 15^th it will increase to 2.25%, a half point increase, but again it is financed into the loan so it really means a slightly higher payment each month.

FHA financing will still be the best option for many borrowers. If you are planning on buying soon, and you are able to get your contract together and start the process in time that we can get an FHA case number before April 15^th, this could save you some money.

Thinking of buying but not sure where to start?

First Time Home Buyer Webinar this is a recording of a webinar I did recently which goes over the entire home buying and mortgage process in just under an hour.

Free Home Buyers Guide – From A to Z, everything you need to know about buying a home and getting approved for a loan.

Peter Thompson 630-479-6424

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