Low Down Payment Requirements of FHA Loans Triggers Criticism

[Corey Dutton]

With only a 3.5% down payment and a 580 minimum credit score requirement, many critics believe FHA loans are encouraging another crisis. In the U.K. and in Germany for example, home ownership is only for those who can afford to bring in 25-30% down towards the purchase. In other words, home ownership is for the privileged few. So why in the U.S. is home ownership given to everyone has nearly a right? Both the Clinton and Bush Administrations pushed heavy propaganda leading up to the crisis with slogans like, "Every American should be

able to own their own home.” Well, we all know what that propaganda created, the worst recession since the Great Depression in the U.S.

With the highest default rate in the sub 600 credit score category, some FHA lenders are pushing this requirement of 580 up to over 600. But with such low down payment requirements, what would prevent these borrowers from walking away when times get tough? In my opinion, nothing will prevent them from walking away if the market crashes again with such low down payment requirements. What is there to lose?

Posted by Corey Curwick Dutton, Hard Money Lender

[Lynn McGeein]

"Nothing will prevent them from walking away if the market crashes again with such low down payment requirements." I'm not sure you are considering factors such as, off the top of my head: 1) unlike the have-a-pulse-get-a-loan scenarios of yesterday, they are required to have proper debt-to-income ratios and meet reserve requirements so as long as they don't lose their job for an extended period, they've proven they can afford the payment; 2) even in a down market, they will have to live somewhere, so unless rents are much cheaper, which is unlikely, it makes more sense to not ruin their credit, keep paying and stay where they are, especially if they've improved the property at all; 3) these loans are much more likely to be 30-year-fixed, not the ARMs of yesterday that adjusted up to a surprisingly unreasonable payment (many didn't understand what they signed up for until, Wham, the payment doubled on them, so they had to walk); 4) they pay MIP, upfront and monthly, so there is some protection for the lender if they do default.

Many of these people would be stuck paying much higher rents, building others' equity instead of building their own, without FHA loans. For instance, we took out a 3.5% down payment FHA loan for a condo when we transferred for employment, allowing us a larger, nicer place for $100s less per month than we were paying for our tiny apartment nearby. Between equity and appreciation, we're actually building wealth instead of just constantly paying more to an apartment complex that raises the rent each year.

  I understand completely not going back to the have-a-pulse-sign-here days, but I do think there are protections in place that strike a nice balance in promoting responsible home ownership, and anyone who has applied for a loan these days knows how strict they are requiring proper documentation.