FHA: Is a 5% Downpayment Really That Big of a Deal?
by Tim Manni
Especially in today’s real estate market where many mortgage lenders are requiring borrowers to put 20% down, saving for an adequate downpayment may be unattainable for many. The findings from a recent National Foundation for Credit Counseling (NFCC) survey agrees:
The NFCC recently asked consumers about their ability to meet the down-payment requirements associated with buying a home in today’s market. Of the more than 2,000 respondents, almost half (49 percent) admitted that they’d never be able to save enough money for a down-payment on a home. This is discouraging news for the housing market in general, lenders, potential buyers, as well as existing homeowners.
On the opposite side of the spectrum, the Federal Housing Administration (FHA) requires borrowers to only put a minimum of 3.5% down. Unable to meet the constraints of 20% down, wave upon wave of new borrowers have opted for FHA loans over mortgages guaranteed by Fannie Mae or Freddie Mac.
Given the FHA’s ballooning market share, and the fact that their risk has grown right along with their portfolio, many have called for the FHA to increase their minimum downpayment requirements. While the FHA made some changes earlier this year that were designed to hedge against some of the recent risk they have accumulated, some argued that the changes didn’t go far enough.
As the FHA is now insuring such a larger portion of mortgages than they have in the past, and since a significant portion of those loans would otherwise have likely been sold and guaranteed by Fannie Mae or Freddie Mac in the past, we wonder, “Is raising the FHA’s minimum downpayment requirement to 5% really that big of a deal?”
Let’s First Take a Look at the Numbers:
Using HSH.com’s Amortization Calculator, let’s examine the difference in the monthly payment if we put 5% down verses 3.5%.
We’re going to use a home price of $200,000 and a mortgage rate of 5.25% (that’s above current market levels for a 30-year Conforming rate, buy we’re allowing for some increase).
- 3.5% Downpayment ($7,000): $1,065 (loan amount = $193,000)
- 5% Downpayment ($10,000): $1,049 (loan amount $190,000)
As you can see, the $16 dollar difference in the monthly payment isn’t all that substantial, yet, the increase means the borrower needs to save an extra $3,000.
Remembering Who FHA Originally Served
Remembering the audience of borrowers who the FHA originally served can help us understand why lawmakers, so far, haven’t seriously considered raising the minimum downpayment to 5%.
In “normal” times, borrowers didn’t need to rely upon the FHA because lending restrictions were not nearly as strict as they are today. Getting a Fannie or Freddie-guaranteed loan with 5% or 10% down wasn’t as big of an issue as it is today.
During the height of the real estate boom, the FHA’s market share was about 2% since there were so many private offerings available (subprime, etc.). Today, recent estimates put the FHA’s market share at upwards of 35% of all new originations.
Will Requiring 5% Down Kill Housing’s Recovery?
Back in March, FHA Commissioner David Stevens said it very well could:
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.
Raising the Downpayment “As Needed”
According to National Mortgage News, lawmakers will likely again reject raising the minimum downpayment requirement, but they could include language into an amendment that would allow the FHA to change the requirement on an “as needed” basis. At this point, we don’t know if that means raising it for more or less-qualified borrowers:
The House is likely to reject an amendment that would raise the minimum downpayment on Federal Housing Administration loans to 5% from 3.5%, but legislators might accept language giving the government insurer the authority to raise the downpayment as needed.
The Rules Committee meets Tuesday evening [6/08/10] to decide which amendments can be offered to the FHA reform bill (H.R. 5072) that the House of Representatives will vote on during Wednesday’s session. If approved by the Rules Committee, Rep. Melissa Bean, D-Ill., will offer an amendment giving FHA the authority to raise its downpayment, or minimum cash investment, requirement. The Bean amendment also asks FHA to submit an annual report to Congress discussing proposed or actual increases in downpayment requirements.
Readers, how would you react if the FHA increased their minimum downpayment requirement?
