Should the FHA demand more money down from those who want big mortgages?
This is the question that HUD raised with a notice last month asking for a bigger down payment from those who borrow $625,500 or more.
The notice gave the general public 30 days to respond to the FHA proposal, a period which has now ended. The outcome was never in doubt: the down payment requirement for big loans WILL rise.
How do we know?
The way government works is that federal agencies and departments must post notices in the Federal Register and give the public an opportunity to comment before enacting various rules and regulations. The reality is that federal agencies and departments are going to look at the responses with the certain knowledge that some will favor whatever it is that’s being proposed, thereby giving the government the authority to enact whatever it was that it was going to enact, the letter of the law having been met.
The result is that the down payment for FHA loans above $625,500 to as much as $729,750 will now increase from 3.5 percent to 5 percent. This is a 1.5 percent Increase, an amount which hardly should impact anyone who can afford such a massive mortgage.
As an example, if you borrowed $729,750 and paid an additional 1.5 percent upfront your down payment would grow by almost $11,000.
To put these numbers in context consider that in January the typical existing home sold for $173,600. As well, fewer than 1 percent of all FHA loans are for more than $500,000 – meaning that few FHA borrowers will be impacted by what is sure-to-be the new down payment requirement.
No less important, with a well-documented loan application down payments are not actually that significant. Consider that VA loans require nothing down and have the lowest foreclosure rate for any mortgage program.
Why then should HUD want to increase the down payment for super-large loans?
One reason is that the politics at this time are right. What politician is going to claim that HUD is abusing the rights of the wealthy?
A second reason is that more down means — at least in theory — less risk for the FHA program. The good news is that more down demand may drop for giganto loans — but is it really good to have additional loans of such size in the first place.
And a third reason is that it’s hard to justify not asking for more from people who can plainly afford it. What are borrowers going to say, “yes, please give me $725,000 but no, I cannot come up with another $11,000?