Scott Garrett, a New Jersey Congressman, introduced legislation today in the US House of Representatives that would raise the minimum FHA loan down payments to 5 percent. Currently, the minimum requirement to obtain a federally backed loan is 3.5 percent.
The move comes as record-high delinquencies drive the FHA’s reserve fund below 2 percent of total loans insured. The program is projected to insure $1 trillion in home loans by the end of next fiscal year, up from $410 billion in 2006, according to FHA. Executives admit that reserves now total just over $30 billion.
The FHA currently insures about 20 percent of all U.S. home loans and opponents to this proposed change argue that a 1.5 increase in the minimum down payment requirement will cause new ownership rates to fall in the coming years. Obviously, this point is true, but it fails to take into account that borrowers who only put down 3.5 percent are up to 7 times more likely to default on a home loan compared to borrowers who put down 5 percent.
As a Realtor, you would probably expect me to be opposed to this proposed change, but I am 100% behind any move that would raise the minimum down payment required for FHA insured loans to raise to 5 percent. I personally believe that there are very few changes that would be better for the long term health of the real estate market than this proposed change. What I do not agree with is not extending the federal tax credit.
If borrowers have more skin in the game, they always tend to act more responsibly. Think about it, when you were younger and your parents gave you something; be it clothes, money or a car, you never took as good care of it as you did when you had to work and pay for it yourself. Don’t get me wrong, initially, you washed that car every week, but after 12 months the only time soap got on it was if you happened to accidentally drive by a car wash.
Raising the FHA minimum down payment will certainly leave deserving individuals and families out in the cold, but not as much as you may think. There are many down payment assistance programs and even federal grants that will go to those deserving borrowers. Teachers, policemen, firefighters and other workforce professionals who are responsible will not be left out in the cold. It is my belief that the folks who shouldn’t be obtaining a home loan for tens of thousands of dollars will be the only people left out as they should be. It is not the responsibility of the American taxpayers to support the bad housing habits of the irresponsible and negligent!
Nashville does have its fair portion of delinquent home loans, but our levels are no where near the national averages. Should you be seeking a short sale or foreclosure opportunity, you will be able to find a deal, but you won’t be the only person looking which is a great sign for our real estate market.
Plus, well qualified buyers are going to be able to obtain conventional financing and that private market can require whatever down payments they wish. If you have great credit and income, you’re probably not considering a FHA home loan anyway.