FHA Tightens Rules, But Preserves Low Down-Payment

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Newspaper headlines are screaming about how the Federal Housing Administration is tightening requirements for the loans it backs. But it seems to me the real news is that, despite much speculation these past several months to the contrary, the FHA, for most borrowers, will continue asking for a minimum down payment of only 3.5%.

Some thought the agency was set to raise it all the way up to 5 or maybe even 6 percent -- In fact, a bill making its way through Congress right now would do just that!

Keeping the 3.5 percent minimum is just what the doctor ordered if there is any real chance to fan the flames of a, thus far, weak economic recovery, which really isn't even evident as yet in the real estate market.

The FHA, of course, doesn't actually lend money to anyone--but it does insure lenders.

For sure, not everyone will qualify for the 3.5 percent minimum down payment. If your credit score is south of 580, the minimum you must pony up will be 10 percent. But the average borrower's score is 693, so this provision won't really make all that much of a difference.

While some, such as CNNMoney.com, have argued that" it's going to be harder to get a government-backed mortgage from now on," I, for one, am not buying it. As I said, most folks will still be able to qualify for the very low 3.5 percent minimum down payment on FHA-backed loans, and this is a far better scenario than a hike in the minimum, which really would have precluded many people from buying homes.

Now, as for that increase in mortgage insurance premiums, it would be the second such increase in the past two years.

Why is the agency doing this?

Look at the numbers: Of the almost $700 billion in loans outstanding, the FHA currently has reserves to cover losses that total about $3.6 billion.

Not good.

So, up will go the fee to 2.25 percent.

But one should not underplay the importance of leaving the 3.5 percent minimum down payment in place. Nowadays, considering the current economic climate, one must look at everything in relative terms.

In relative terms, this is good news, indeed, for many potential home buyers and just may encourage more to tip their still frozen toes into the market.

Charles Feldman is a journalist, media consultant and co-author of the book, "No Time To Think-The Menace of Media Speed and the 24-Hour News Cycle.

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