If you can't afford 5% down...you probably can't afford that house!

They should require at least 10 percent and probably more to ensure you have equity if you need to sell due to job change or job loss.

Unfortunately for those with credit scores of 500 to 579, there are very few lenders out there will that will even touch it. Most lenders require a minimum of 620 credit scores. Some banks have even raised it to 660. FHA has been the closest loan out there that resembles the 100% financing that was going on during the bubble. Now, those people are flocking to FHA as resources are depleted. If you don't have the 5% plus closing costs, you should not be buying. They call FHA the "affordable housing option", however there is not much that can be considered affordable as home prices are still sky high. Increasing the down payment requirement would lower values even more as the demand for housing will go down when more money comes out of pocket. People are willing to pay more for the home with less upfront costs. When upfront costs go up, the cost of the home will have to go down.

Even a 5% down payment would not be sufficient in normal market conditions. Today, we have abnormal market conditions. Even if you put down the 5%, a year from now you will have virtually no equity in the home as prices continue to go down. Why put down all that money only to lose it all a year later? Even if you buy a short sale or REO, your market value is exactly that value as other homes in the area will go for the same price. These distress sales are setting the stage for appraisal values. Many resales with the HVCC requirement are not coming in for the contract amount as these distress sales are used as comps.

As I have said before, maybe lower real estate values is a good thing. I would make the minimum down payment 10% across the board. Although 20% has been the standard for Fannie and Freddie, 10% still leaves the homeowner with enough skin in the game to avoid strategic defaults. In the event the homeowner does default, a 10% down payment should be sufficient to recover any losses incurred. A 5% down payment may not be sufficient. The other thing to consider is if home values go down, then so will the amount of your down payment. With higher taxes on the horizon, debt to income ratios should also be lowered to ensure these new loans are made to those with the ability to repay. Lower home values could be the answer as the cost of living goes down. To spend 50% of your net pay on housing just seems absurd.

R, actually that is not necessarily true. I bought my home 10 years ago through FHA. The requirement of 3% down was the primary reason I was able to make the jump from renting to homeownership. In the 10 years that I have been in my home, I have never been late on a payment. Additionally, by not having to put down a larger amount of money, I was able to build a nest egg that covers maintenance and upkeep. There are those of us for whom FHA loans make all the difference in the world.

honestly, i think it really depends on the circumstance. i bought a house last year and 3.5% was my max, but that's because i was also in the process of paying for a wedding. other people might be paying a lot for rent, making it hard to save up, but will still have enough cushion if they have a low, stable mortgage payment. or someone may have just gotten a new job/raise that changes their situation going forward.

when someone has a low downpayment, what makes the most sense to me is closer scrutiny of their debt/income ratio. maybe a lower limit on the amount a bank will finance.

to me, the bigger problem still seems to be a willingness to lend out way more than people should actually be spending. the bank was willing to give me a loan for nearly 2x the amount i was actually comfortable spending. if i had taken out my max mortgage, with only 3.5% down... well that's a much more tenuous situation.

20% down for everyone is my vote

Will it help FHA's solvency? Yes.

Will it disqualify be buyers out of the market and add downward pressure to home prices? Yes.

Is that a good thing? Depends on whether or not you think expensive homes are a good thing.

Additionally, FHA used flawed analysis and logic to arrive at their alarmist 40% reduction figure. First, much of down payment money is gifted and there is no way of knowing the max available gift funds for each loan. Second, many borrowers have multiple sources of their own funds (checking, savings, CD, 401k, IRA) and additional accounts above and beyond what is required are rarely documented as "over-documenting" the file is a good way to delay your approval.

I'm not sure I understand this. The FHA is making loans to people with low credit scores and minimal down payment. Doesn't the FHA get their money from the taxpayers? So I, a taxpayer, am being put in the position of lending money to those who really do not qualify for loans. I got a idea. Why don't we let private lenders determine who should get the loans and leave me out of it. Why should I get stuck for the bill when the unqualified and undeserving fail to meet their obligations

FHA is not funded by the taxpayer. It is paid for by their "upfront mortgage insurance" (UFMIP) and monthly mortgage insurance premium. This money goes into a pool to cover loan guarantees and losses. They are suppose to keep certain levels of liquidity, which of course has deteriorated since defaults have risen close to 20% for loans originated in '07 and '08 ('09 defaults not yet released). As these reserves have dwindled to the lowest levels in recent history, FHA has been forced to increase these premiums. In the event that FHA does not have the funds to cover future losses, the Treasury will cover the additional losses for them. When FHA has the money in the future to payback the Treasury, they will do so from their excess reserves.

FHA has been known for making loans for people with low credit scores and minimum down payment, however that is not so much the case anymore. Virtually every lender sets their guidelines to conform to their own standards with minimum scores of 620 to 660. Before the crisis, there was no minimum score required. They also have made changes with down payment assistance programs. Now, people look at NACA as a way to get a loan when FHA is no longer an option.

Thanks for jumping in with an explanation, Frank!

Have I mentioned lately that I love how informed many of you Wonk readers are? The conversation here is never dull.

Hey Frank, Thank you for sharing your knowledge on the FHA. Your post are always a education to newbies like myself

Raise it a promile and watch sales drop by thousands...sorry, but that's reality.

I am in a small HOA where the President -- a former refi salesman during the boom years -- is adamantly against getting the building FHA-certified, due to allegedly "high delinquency rates." She alleges that the typical FHA homeowner is likely to miss payments on the HOA dues. My point is that, when you have30 to 70 percent of mortgages in a given area currently financed via FHA, you are vastly restricting your pool of potential buyers by banning FHA. My understanding is that potential buyers can still get "spot mortgages" but that this process is heavily laden with red tape. Maybe more experienced readers can shed some light on the spot mortgage process.

Any mortgage pros who could answer Craigie's question?

I'm not certain whether spot approvals are even allowed anymore -- I've seen several articles that said they were due to disappear Feb. 1.

You're right that FHA is a major part of the market. It's particularly large for first-time buyers, so some condo developers have worried that hardly anyone would buy if they couldn't use FHA loans.

Spot Approvals are no longer an option. You could get them in the past, but now FHA wants the HOA to be approved. The President of your HOA has a valid concern that the fees won't get paid if the loan goes in default. The default rates for FHA purchases are not as high. The main reason for high default rates during '07 and '08 was due to the "FHA Streamline" which did not require an appraisal or income verification. All that was checked was the last 12 months of the mortgage. If there were no lates, then it was approved. Credit score also did not matter. One thing you might want to do is explore the option of putting it to a vote in your community. You should be able to hold a meeting and if enough people want the HOA to be FHA Approved, you should be able to get it done. I know that if your HOA does not allow FHA financing, it will be very difficult to sell homes in your community. The buyer will go elsewhere so they can get the financing. When you limit the number of buyers in the community, it will pressure values downward as you will have to lower the sales price to compete for the sale.

Yes, absolutely overthrow your HOA president as they are acting against the owner's best interests. Spot approvals are a thing of the past.

I don't agree with Frank's blame it on the streamlines though. Two reasons: 1. streamlines were already FHA loans 2. streamlines reduced the housing payment on those pre-existing FHA loans, therefore, independent of credit and income, reducing someone's interest rate and housing payment on a loan that is already FHA, reduces default risk on that FHA borrower.

The circuitous, money laundering down payment assistance programs had much more to do with it. Statistical evidence has shown that the use of a DPA increases default risk by a factor of 2.5-3.0. Along that line of reasoning and inline with other statistical evidence examining the performance of the 2003-2005 vintages, increasing the required down payment from 3.5% to 5.0% would decrease the default risk and rate in addition to providing additional insulation from loss when a default does occur. Not a popular idea, but neither is anything that jeopardizes the value of a leveraged asset 2/3rds of voters already own.

I don't believe the down payment issue had any causal effect on our current housing situation.

The main cause was lax underwriting standards, stated wage earner (liar's) loans, and the ability to transfer all risk to the final investor.

A well underwritten, fully documented FHA Loan with a 3.5% down payment will preform just as well as a 5% down loan.

This argument is proved by the VA (no down payment) portfolio.

It is preforming very well.

The thing to remember is lunch isn't free. Nothing down or little down will cost you somehwere at some point.

I own to homes they pay their own way. I rent the one I live in. Works for me this way. I'm not the kind who loves home improving or the repairs there of.

Your credit score will make a huge difference!