5% Down On FHA loans? Really?
Looks like our elected officials are at it again. They are trying to fix the housing crisis by increasing the cost to purchase. FHA loans (Federal Housing Administration) are backed by the government and insured through up-front and monthly mortgage insurance paid by the borrower and required by the program.
The thought is that increasing the required FHA down payment from 3.5% to 5% will shore up the coffers of the government backed FHA mortgage program. In real dollars, this means that on a $200,000 mortgage, the required down payment will increase from $7000 to $10,000.
In the last few years, the required down payment has already increased from 2.25%, and the monthly mortgage insurance has increased from .5% to 1.15% of the monthly payment.
For the majority of borrowers these increases to the monthly mortgage insurance has already decreased their buying power.
In my opinion, an increase of the down payment required will:
- decrease the buying power of first time home buyers even further
- lower the number of credit-worthy borrowers who can qualify for a mortgage
- drop the prices on an already greatly declined housing market
- increase the use of down payment assistance (usually local government subsidies), decreasing the "skin in the game" for first time buyers
- further decrease the number of move-up buyers, already short on equity giving them less money to put down on a new home. It is noted that move-up buyers don't typically qualify for down-payment assistance programs.
According to reports, in March of 2010 when the increase was previously proposed:
An increase in down payments to 5%, from the current minimum 3.5%, would limit new FHA-backed loans by 40%, equivalent to 300,000 fewer home sales, according to testimony that FHA Commissioner David Stevens is set to deliver on Thursday [03/11/10].
“We share the goal of increasing equity in home purchase transactions, but determined after extensive evaluation that such a proposal would adversely impact the housing market recovery,” Mr. Stevens says in his testimony.
Since that time we have seen an increase in foreclosures, short sales has become an every day phrase, a tightening of credit requirements across the board, and a decrease in home sales.
Although I don't want to spend my tax dollars to bail out yet another program, I don't believe that this increase will help the consumer. The only thing this does is to lessen the risk (slightly) to the banks.
Instead of making yet another change to the mortgage requirements, let's police the banks and determine exactly what has happened to the over 11 TRILLION DOLLARS that was supposed to help stabilize our economy. I don't know about you, but I don't feel too stable! Our government is putting its finger in the pin hole leak instead of quadruple sand-bagging around the money that has already been spent or promised.
In the meantime, if you are sitting on the fence and plan on using an FHA loan to purchase a home, you may want to step up the home search or plan on shoring up your savings plan.
If you would like help with a budget to help to ensure you are mortgage ready in Maryland, no matter what the up-coming changes, give your favorite mortgage loan officer a call. If you don't have a favorite, call me, Mortgage Mama. I will become your favorite!
5% Down On FHA loans? Really?
Bridget McGee Maryland Mortgage Mama NMLS# 196068 SWBC Mortgage. 410-960-2061 EHO firstname.lastname@example.org or www.marylandmortgagemama.com
If you are considering purchasing a home in Maryland and want to be sure you are mortgage ready, my brother Tony and I will be happy to help! We help to make the mortgage process a pleasure!
If you already own your home, we are happy to provide a no-cost mortgage review to help you to determine if refinancing may be in your best interest. Please contact me at 410-960-2061.