New Legislation Proposing an Increase in FHA Down Pament from 3.5% to 5% - To Keep Home Owners from Defaulting on Loans.

How will this Effect the Central Oregon Housing Market? New Legislation Proposing an Increase in the FHA down payment from 3.5% to 5% - To Keep Home Owners from Defaulting on Loans.

According to a recent article on Yahoo News "More cash down proposed for FHA-backed loans,"

...the administration wants borrowers to have a stronger equity position on their loans. One possibility would be raising the current 3.5 percent down payment requirement. Proposed legislation in Congress would raise the down payment required to 5 percent.

The rational behind the increase is two fold:

...to get homeowners more invested in their property and therefore less likely to default on loans....and to better protect the FHA...

At first glimpse this makes sense, then again maybe not. If a homeowner has more equity in their home are they really more likely to not default on the loan in a period of financial hardship? Using my recent and current clients as an example, the FHA loans have been on properties under $300,000. Most of then have been on properties under $150,000. Let us take a look at the math.

FHA Loan Down Payments 3.5% vs. 5%

$300,000 x 3.5% = $10,500 down payment

$300,000 x 5% = $15,000 down payment

Difference on $300,000 Loan = $4,500

$150,000 x 3.5% = $5,250

$150,000 x 5% = $7,500

Difference on $150,000 Loan = $2,300

Is an additional $2,300 to $4,500 going to keep home owners from defaulting on their loans or will it keep potential first time buyers from being able to afford homes? If a homeowner falls into financial hardship would the extra money serve the homeowner better in their bank account or in their equity? I'm not sure that $2300 in equity is going to save the day.

Congress, be honest, the increase in down payment is to protect the FHA. Which may be important too.

"FHA's reserves have fallen to $3.6 billion, compared with $685 billion in outstanding insured loans for the fiscal year ended Sept. 30. That 0.53 percent ratio is far below the 2 percent threshold required by Congress."

How will this Effect the Central Oregon Housing Market? Are you financing your next home with an FHA loan? How would this change effect you?