Written By: Bonnie Wilt-Hild, Op-Ed Writer
I Just recently read an article regarding new legislation that was introduced in Congress on Monday which would increase the minimum required down payment on an FHA insured mortgage from 3.5% to 5% and I thought this would be a good time not only to discuss the issue but also indicate why I am firmly against the increase.
According to Rep. Scott Garrett of New Jersey, FHA’s current policy allows a minimum down payment of 2.50% and allows a borrower to roll closing costs into the new loan which as we are all aware is completely inaccurate. Actually, this interpretation of FHA’s policy is completely inaccurate even from a historic standpoint.
FHA previously used the varying LTV method and required the borrower to pay a certain portion of their closing costs out of pocket in order to meet a minimum required investment totaling at least 3% but as of January 1, 2009 and mortgagee letter 2008-23 this method was also retired and the use of the flat down payment of 3.5% was introduced and mandatory for use. With this information you can see that the good Representative Garrett is mislead in his information where FHA down payment requirements are concerned.
Further, for Congress to approve this bill will further stagnate the housing market which finally appears to be recovering not to mention make homeownership for the low to moderate income borrower unattainable. The FHA mortgage insurance program was designed over 60 years ago to serve exactly that segment of the population as the federal housing administration felt that the rest of the population, that being the moderate to upper income segment of the population were already adequately served by existing mortgage programs those being conventional program types such as FNMA and FHLMC. To redesign the FHA mortgage insurance program to mirror that of other conventional programs would make the program useless to those individuals for which is was designed for.
Further, as Rep. Garrett discussed the overall risk factor where minimum investment is concerned and the recent foreclosure rate, he neglected to mention that most of those foreclosures and other significant defaults were the result of sub prime mortgage lending practices and other significantly risky products like stated income and stated asset loan programs. As a full documentation mortgage insurance program the overall risk from an underwriting perspective is diminished greatly in comparison to that of a no documentation loan.
Further, it would be irresponsible not to take into consideration the acceptable underwriting practices of the most recent 9 years where mortgage industry as a whole was concerned. Loan approval hinged less on an underwriters opinion as to if or not a loan would perform and more on an AUS’s suggestion as to if a loan should be approved via automated methods and if the credit score was sufficient to meet program guidelines. Never in the history of FHA has the federal housing administration cooperated with such lack underwriting principals and has always required due diligence in underwriting even on manually underwritten cases.
With that I will say that it is my professional opinion that increasing the minimum required investment where FHA insured mortgages are concerned is a poor idea and will harm a greater segment of the population then it will help those who truly are credit worthy applicants. Increasing the minimum down payment will do less good then requiring underwriters to underwrite cases beyond credit scores and AUS methods. As always happy underwriting.
About The Author
Bonnie Wilt-Hild - As an op-ed writer, Bonnie has held many mortgage underwriting positions, including Senior FHA DE Underwriter for a major lending institution. With over 25+ years of senior-level FHA/VA Government underwriting experience, Bonnie is considered the "Queen of FHA Loans".