Will FHA Require 5% Down?

Some lawmakers are trying to make that happen.  What are my thoughts?  It probably isn’t a bad idea since the more “skin” you have in the game the less likely you are to just walk away from a home.  I think more importantly isn’t so much credit scores, although it is important, but the debt to income ratios and having reserves after closing.  Fannie Mae is updating their automated underwriting system on December 12th which will cap debt to income ratios at 45% and a maximum of 50% with compensating factors.  I would image this will affect FHA too.

Right now you can go up to 55% on an FHA loan and as high as 65% on a Conventional loan.  Remember, this is based on gross income and does not take into account groceries, insurance, dependents, gas, etc.  Only what is on your credit report.  I do understand in certain instances why you would allow a higher debt to income ratio but the automated underwriting systems are taking this into account.  There isn’t any human side to this.  Yes an underwriter has to review it too but the automated findings pretty much govern what can be done. 

“The FHA has announced a handful of measures designed to improve quality control and manage risk. But lawmakers last week introduced a bill introduced that would require larger down payments on FHA-backed loans , raising the minimum down payment to 5% from 3.5%. The FHA opposes such a move because the agency is playing a key role in helping breathe life back into the housing market.”

http://blogs.wsj.com/developments/2009/10/08/is-the-fha-headed-for-a-taxpayer-bailout/