A key mortgage regulator has some concerns about down payment assistance programs for FHA loans. You should also have concerns about using this type of program to finance the down payment on a mortgage. The controversy over down payment assistance could serve as a useful reminder to consider the benefits of a large down payment on your home.
David Montoya, the Inspector General of the U.S. Department of Housing and Urban Development and the person responsible for auditing FHA lenders, has expressed the opinion that some payment assistance programs might violate the laws governing FHA mortgages. Normally, the FHA requires a down payment of at least 3.5 percent on its loans. Montoya's concern is that down payment assistance programs that provide money toward the down payment in exchange for the borrower paying a higher interest rate on the loan is effectively a way of circumventing the 3.5 percent down payment requirement by effectively folding the down payment into the rest of the loan.
Interestingly, this position is at odds with what FHA officials believe. So far, the FHA has decided to let these down payment assistance programs continue. But whatever the ultimate resolution of this disagreement proves to be, it may be in your best interests to plan on making a larger down payment anyway.
How This Might Affect Borrowers
Even if the FHA continues to allow down payment assistance programs to continue, the fact that the person in charge of auditing FHA lenders disapproves of them might discourage those lenders from offering such programs. After all, businesses typically try to avoid irritating the regulator responsible for auditing them, and lenders are not going to be very keen on taking the legal risk of making loans that might be ruled to be outside of FHA guidelines. Besides the regulatory ramifications, finding certain loans outside of those guidelines might restrict the lender's ability to sell off its loans later on. Lenders often package existing loans for sale to investors in order to raise capital to make fresh loans.
So, whether or not certain down payment assistance programs are actually banned, borrowers may find them a lot more scarce than in the past. In the long run, that might be a good thing for those borrowers.
Benefits of a Large Down Payment
While it is tempting to be able to buy a house without the delay and difficulty of saving in advance, borrowers should also be mindful of the benefits of a large down payment. Here are some of those benefits:
- It tests your budget discipline. Saving for a down payment can be a great dry run for seeing how well your mortgage payments will fit into your budget. If you have trouble putting aside a little extra money for a down payment, you may want to question whether you would also have trouble meeting your monthly mortgage payments and the other financial obligations that come with owning a home.
- It reduces the total amount of interest you will have to pay. A larger down payment reduces the amount you are borrowing, and therefore reduces the amount of money on which interest will be charged.
- It may reduce your interest rate. Besides reducing the amount of loan principal on which interest is charged, a bigger down payment can often earn you a lower interest rate from your lender.
- It may also reduce your mortgage insurance premium. Mortgage insurance premiums on FHA loans vary according to the loan-to-value (LTV) ratio. The bigger the down payment, the lower the LTV ratio will be, and this can result in a lower mortgage insurance premium.
- It gives you more financial flexibility. A larger down payment gives you instant equity in the home, which should make it easier to refinance should the need or opportunity arise.
FHA down payment assistance programs which require higher interest rates are controversial, but still available. Still, regardless of what the regulators decide, there are good reasons for you to bypass these programs anyway.