June 30, 2022

Lawmakers Seek To Raise FHA Minimum Down Payment To 5%

The House Financial Services Committee proposed draft legislation that would raise the minimum down payment on FHA loans to 5% and also prohibit the financing of closing costs.

The current minimum down payment for FHA borrowers is 3.5% with a credit score of 580 or higher.  For FHA borrowers with credit scores below 580, a minimum down payment of 10% is currently required.

Critics of the FHA loan program have argued that the current down payment of only 3.5% combined with low credit score requirements has exposed taxpayers to potential losses.   Spencer Bachus, Chairman of the House Financial Services Committee stated that “This hearing and legislative proposal come at a pivotal moment, as the Committee debates the future of the mortgage finance system, and in particular, government guarantee programs that could expose taxpayers to significant losses.”

Industry groups immediately voiced their opposition to higher down payment requirements, claiming among other things, that a higher down payment would prevent qualified mortgage borrowers from purchasing a new home.

The National Association of Realtors (NAR), in objecting to the proposed down payment rule, argued that low down payments do not automatically make borrowers a higher candidate for loan default.  The President of the NAR, Ron Philips, testifying before the House Financial Services Committee said that “FHA’s foreclosure rate remains less than conventional mortgages, so we don’t believe changes to the down payment would do anything but disenfranchise many creditworthy homebuyers.”

Also criticizing the proposed increase in FHA down payments was the Mortgage Bankers Association, also arguing that low down payments is not the primary factor leading to loan defaults.  Mortgage Bankers Association Chairman Michael Berman said that “While down payment certainly impacts default risk, other compensating factors, particularly full documentation of conservative loan products, are more influential mitigating factors.”

A non industry group giving testimony argued that raising FHA minimum down payments was an essential step in preventing huge future losses on FHA loans.  Citing voluminous statistical studies, the Cato Institute of Washington said “Given the relatively safe features of an FHA loan, we do not have to guess about loan characteristics driving the borrower into default.  We know it is equity and credit history that drives losses.”

In addition to requiring increased minimum down payments for FHA loans, the Cato Institute also said it was imperative to implement other steps to prevent future loan defaults.  The Cato Institute recommends raising minimum credit scores to 600, approving only borrowers who have debt to income ratios that are reasonable and requiring a 10% down payment for borrowers who have a credit score of less than 680.

Increasing the minimum down payment on a $250,000 mortgage would require borrowers to come up with an additional $3,750 for a total down payment of $12,500.