FHA may raise 3.5% down payment

Home buyers might need to put down more than 3.5% to get an FHA-insured mortgage loan.

Home buyers who want to qualify for an affordable FHA mortgage loan may have to come up with a slightly larger down payment in 2010.

That’s because the Department of Housing and Urban Development (HUD) is considering increasing the required minimum down payment for an FHA loan. Currently, the minimum down payment is just 3.5 percent of the purchase price of the home, but could be increased to as much as 5 percent.

In addition HUD officials are also looking at potentially changing mortgage insurance premiums required on FHA loans, as well as raising the minimum credit score required for an FHA loan.

What is an FHA loan?
The FHA is a federal agency that’s part of the U.S. Department of Housing and Urban Development (HUD). The FHA doesn’t make loans, but rather offers insurance that protects the lender if the borrower doesn’t repay the loan.

FHA loans are a crucial element of today’s housing markets. At the height of the housing boom, the FHA insured only about 3 percent of new loans. But today, the FHA’s share is up to nearly 30%.

“By keeping affordable loans flowing, particularly to the growing ranks of first-time home buyers, the FHA has been critical to our nation's economic and housing market recovery,” HUD Secretary Shaun Donovan said in a statement.

Reasons for FHA loan changes
“We are taking a number of aggressive steps to ensure that we are able to continue to support the housing market in the short-term and provide access to homeownership to the underserved in the long term, while minimizing the risk to the American taxpayer,” FHA Commissioner David Stevens explained in a statement.

The FHA needs to increase the minimum down payment to make sure home buyers have more equity in their home, according to Donovan. Homeowners who have more equity are less likely to default on their loan.

“We have made the decision to exercise our authority to increase the up-front cash that a borrower has to bring to the table in an FHA-backed loan—to make sure that FHA borrowers have more ‘skin in the game’ and a stronger equity position in their loans,” Donovan said in prepared Congressional testimony.

The FHA also has asked Congress to grant the agency the authority to increase the annual premium that borrowers pay for an FHA loan. Higher premiums would help the FHA strengthen its secondary capital reserves, which are used to pay claims on insured loans.