Very shortly, the down payment requirement for big FHA mortgages will likely increase from 3.5 percent to a full five percent.
This is not a big deal for most borrowers because it impacts only loans of $625,500 or higher. However, the whole idea of extra-large FHA mortgages by itself raises a question: Isn't the FHA program intended for first-time borrowers and those in the middle class?
This is the widespread assumption but the facts are little different.
The National Association of Realtors reports that in January 2013 the typical existing home sold for $176,300. And according to HUD, it turns out that in November 2012 – the latest figures we have available – the average FHA loan amount was $183,580. That was just the size of the FHA mortgage -- the actual price of the house was higher because FHA loans require at least 3.5% down. It looks as though FHA borrowers might be buying more expensive homes than non-FHA buyers.
Speaking before the Congress, NAR President Gary Thomas said in February that "a common misconception exists that FHA was originally intended to benefit low-income borrowers who could not afford a large down payment on a new home. While an upper limit of $16,000 for a home loan may seem exceptionally small today, in 1930, the national median home value was $4,778. Only 3.2 percent of homes were valued between $15,000 and $20,000. The majority of homes were valued between $2,000 and $7,500, with the largest number between $3,000 and $5,000."
I have no doubt that the statistics cited by Mr. Thomas are correct; that said, we live in an evolving world. There is a considerable political appetite to limit the size and scope of the FHA insurance program. Part of this inclination and unceasing public commentary is motivated simply by the desire for greater profits in the private sector. As Bloomberg reports, "The once-moribund private mortgage insurance industry is increasing market share and raising cash as it presses its advantage in lobbying Congress to consider changes that would reduce the role of the Federal Housing Administration, its dominant government rival."
But there is another aspect to the visible public preference for an FHA which serves first-time home buyers and those in the middle class. You can see HUD reacting to the growing stream of public opinion with its latest proposal to raise the down payment requirement for super-huge FHA mortgages.
Everybody understands that the down payment increase is not a high hurdle for anyone who can afford a mortgage of more than $625,500. On the other hand, the politics of such an increase are good: A statement is being made and not too many people are being impacted.
If FHA loans are typically a little larger than the average mortgage, it's probable that nobody cares. But huge FHA mortgages do stand out, reason enough for the proposed down payment increase.