New FHA down payment, fee requirements intended to prevent taxpayer bailout
FHA-insured loans have become increasingly popular, especially among borrowers who have little cash on hand for a down payment. Currently, about half of all borrowers use FHA-backed loans.
According to a recent Reuters report, the FHA will require borrowers with a credit score below 580 to make a down payment of at least five percent on a home purchase. And while that might not affect many buyers (because most FHA lenders have a minimum score cut off of 620), the change to the mortgage insurance premium will: it will increase to 2.25 percent from 1.75 percent. That might not sound like a lot, but on a $100K loan, the upfront insurance premium will increase from $1750 to $2250. The seller’s maximum contribution to the buyer’s closing costs will also change: it will drop from 6% to 3%. The contribution is not required, but many sellers offer it as an incentive to buyers, and buyers with little cash on hand often eagerly accept it to cover their closing costs.
Why the change? Borrowers with lower credit scores and cash reserves are riskier. They’re more likely to default on their loans. If they default and the lender doesn’t have money put aside to cover the loss, who pays? Taxpayers. Because the FHA’s reserves – the money it keeps on hand to cover losses – is far lower than it needs to be (just .53% of the value of all of its insured loans, instead of the 2% required by federal law) it needs to build its reserves to avoid having to ask taxpayers to cover losses. The increased fees and tighter requirements are expected to discourage riskier borrowers, and provide a bigger cushion against future defaults.
Posted by
Vicky Nann
on 01/26/2010