Buying a house is a costly process. Buyers have to hand over money to pay for appraisal, inspection costs and contract fees. The largest cost to any buyer is the down payment on the home due at the time of purchase. Many financial experts advise buyers to put as much into a down payment as possible in order to have lower monthly payments and more equity in the home. However, many first time or lower median income families may not have enough cash saved to put down a large down payment. Currently, the Federal Housing Administration (FHA) requires a minimum of 3.5% down payment on any of their backed loans. A new bill is being proposed that could raise the minimum down payment to 5%, also raising the amount of money buyers would need in order to purchase a home.
The Meat and Potatoes
The FHA is funded by the mortgage insurance premiums that homeowners pay each month. Their duty is to protect lenders from default when a buyer fails to make their mortgage payments. Being funded through insurance premiums ensures they operate at no cost to the taxpayer. Law makers are pushing for the increase to keep the government from being responsible for a bailout in the future. The concern is that a person that cannot afford to pay a higher down payment may also not have enough money to maintain their mortgage loan over time. The higher down payment minimum is assumed to prevent those that may be more likely to default on a loan from obtaining a loan in the first place. The general consensus is that buyers who pay more in a down payment are more invested in the property and less likely to default on the loan. In years past, a borrower could roll their closing costs into the loan and reduce the amount of out of pocket expenses drastically at the time of closing. This new bill would prohibit borrowers from rolling the closing costs into the loan and increase the minimum amount the borrower is required to have to obtain the mortgage loan.
Many government officials are concerned about the effect this new bill could have on the housing market. By raising the down payment minimum, many hard working Americans could be prevented from obtaining a loan they would otherwise qualify for, reducing the number of active mortgage loans. The concern over the mortgage loan crisis may have prompted a reaction that has the potential to negatively impact the housing market over time. What is meant to protect the industry from the need for a taxpayer bailout could reduce the profitability of the mortgage industry.