FHA Down Payment Requirement Increasing Soon

If you're looking to buy a home with a FHA loan, now is the time to do it. With the passage of the Housing and Economic Recovery Act of 2008 (HR 3221), the FHA down payment requirement increases from the current 3% to 3.5%. While this change appears small, it can seriously add up with larger loan amounts. And, closing costs will no longer be considered as part of the amount of money they have to have involved in the transaction.

It was originally rumored that the FHA was increasing the down payment requirement on October 1, 2008. This is incorrect. But, FHA mortgage insurance has changed.

New FHA Mortage Insurance Premium Structure
Effective October 1, 2008, for purchase transactions, FHA has both a onetime upfront mortgage insurance premium (UFMIP) as well as monthly mortgage insurance (MIP), except for loan terms less than 15 years combined with a down payment of 10% or more. The following is the breakdown for the new FHA mortgage premium:

How do these new premiums affect buyers?
Most FHA loans fall into the category of less than 5% down payment and a loan term greater than 15 years, so the majority of buyers will be affected by the premium increase. However, the effect will be minimal considering that FHA still has lenient credit underwriting on home loans.

For example, if you're buying a property for $350,000, the base loan amount after your 3.5% down payment will be $339,500. The old MIP would have been $141.46. The new one would be $155.62. That's only a difference of about $14.16 per month. The new UFMIP would be $5,941, of which $5,900 can be financed, is less than $50 more than the old UFMIP of $5,092.50.

As you can see, even with the increased FHA mortgage insurance premium, the FHA loan is still an excellent deal especially for those with less than stellar credit. Under conventional financing, you need a score of at least 680 if you're putting 20% down and at least 700 if your startup equity is less than 20%. While banks are starting to lend to one another, the credit crunch is still tight for consumers. It will be a while before home buyers and home refinancers see any thawing, and even then, it still won't be easy to get credit. Thus, FHA is still your best best.