Article by Matt Dornic
Does your credit score fall below the 640 to 650 range? If so, good luck getting a home mortgage or refinance throughtraditional lending channels. Since the housing market crashed in 2008, lenders have tightened their belts and turned away borrowers who have less-than-perfect credit scores or low downpayments. Luckily for you, if you’re looking to buy or refi, the local bank isn’t your last resort for a home loan.
First, the good news: Thanks to mortgages backed by the Federal Housing Administration (FHA), qualified home buyers can find financing with a 3.5% downpayment and credit score as low as 620. In turn, borrowers who take an FHA-backed mortgage pay a premium of roughly 1% annually. Depending on the geographic location of the home — the same home costs more or less in different markets — you can get an FHA-backed loan for up to $729,750. (This will drop to $625,500 at the end of September unless Congress changes it.)
Now, the bad news: Some lawmakers want to fix standards that aren’t broken and raise the minimum downpayment for FHA loans to at least 5%. In addition, they’ve proposed legislation to lower the program’s loan limits. Legislators who support FHA reform hope to limit the government’s involvement in the housing market. But that would decrease the number of Americans who qualify for these loans.
If the logic behind these proposed changes seems nonsensical to you, that’s because it is. Unlike mortgages backed by Fannie Mae and Freddie Mac, FHA loans didn’t play a part in the 2008 housing crisis. Instead, they’ve helped stabilize the market, making home ownership an affordable reality for millions of Americans since the Great Depression.
Plans to revise FHA are misdirected, especially when you consider these factors:
- Raising the minimum downpayment to 5% from 3.5% will do little to reduce the risk of default, but will put home ownership out of reach for many. It would take the average American family, living frugally and saving at the current national rate, nearly seven years to save for a 5% downpayment on a $200,000 home and more than 10 years to save for 10% down, according to NATIONAL ASSOCIATION OF REALTORS® estimates.
- Trying to sell? Fewer loans mean fewer buyers. The outcome: Plummeting property values as housing supply exceeds demand.
- FHA doesn’t cost you, the taxpayer. It’s self-sustaining and has never required direct funding from Congress to continue its mortgage insurance program.
- Limiting home loans for qualified buyers will further damage an already fragile housing market.
- Potential home buyers will be held hostage by the standards and interest rates established by Wall Street.
FHA plays a critical role in the U.S. housing market by holding down interest rates and offering millions of qualified buyers the opportunity to own a home. Rather than limiting this successful program, Congress should consider strengthening it.
What do you think of Congressional proposals to raise the FHA downpayment minimum? Would you be able to buy a home and pay closing costs if the downpayment on an FHA-backed loan went up to 5% from 3.5%?