Low Down Payment Requirements of FHA Loans Triggers Criticism

10 Replies

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

"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.    

So having 2 months of pay stubs is a good loan? That's all it takes. You have to have the right income, but you just need 2 months of pay stubs to get a loan. 

I agree that the stated income loans caused this problem but here's an example. My husband's worker makes $12.00. He just switched jobs 2 months ago and is with a new company. He just bought a townhome with 3.5% down and he just switched jobs. What is the guaranty that he will stay at that job or get fired a week after he closes on the house. This is not a safe loan. Thank heavens for MIP. Government backed loans are the highest risk on the planet. No one else will risk doing the deal but send it to Fannie and Freddie baby they'll do it! Why not? Our tax dollars will be bailing it out.

Further, take a look at Germany and the U.K.. Home ownership there is not a RIGHT like it is in the U.S. You have to have 30% down to buy a home in Germany. That's how it should be in the U.S.A. Period. Everyone rents in Germany. If you don't have the down payment, you can't afford to buy a house. All of this propaganda from Clinton and Bush Administrations, "everyone should own their own home," is the propaganda that led to the worst recession in U.S. history. We should start following the lead of countries like Germany that don't view private property ownership as a RIGHT. It's a privilege Lynn, not a RIGHT. 

Honestly, as someone in the RE biz, you should be thankful for Freddie Mac and Fannie Mae. Government subsidies of housing create much more turnover than there is anywhere else, and create a housing market here that's completely unlike anywhere else. Imagine if 20-30% of the buying transactions disappeared, and that's a good picture of what life would be like in a stricter system in those countries that you mentioned.

These subsidized loans happens largely because US social policy is mostly non-existent towards public housing or rent subsidies when compared to those other home-owning countries. In fact, this discussion isn't really a housing discussion, it's a political discussion if we're just going to be talking about what the government should and should not do.

You can find the FHA guidelines online, which are actually fairly extensive. I'm not a lender, but I've read through the guidelines and have obtained many loans over the years. It's my understanding that you need a minimum 2 years employment in the same field, not the same employer, and they do employment verification. So if you are an accountant and go to another accounting job, it counts. If you are an accountant then quit to become a real estate agent, your accounting job won't count towards your 2 years. They would not even consider my son's paid internship while in college as part of the 2 years even though he went to work full-time for the same company the day after graduation. (It used to be college degree and internships counted as long as you got a job in that field). He had to show 2 years' full employment, something around 40% DTI, 3 months' reserves, decent credit, etc. And his was pretty easy. For ours, we had to jump through so many hoops that we almost just gave up, with my husband's employer having to write statements about travel expenses being reimbursed, years of tax returns as we have rental income, letters of explanation for almost every deposit over months of statements, just an amazing amount of paperwork. I don't know of a lender these days that will give you an FHA loan for 2 month's pay stubs, so I doubt that's all he had to provide.

That's not true. You can get a loan with 2 months paystubs (if you're in the same line of work). That's not a safe loan. Switching jobs is switching jobs.

Once again, home ownership is a privilege, not a right. FHA is trying to make it a right and they are using our hard earned tax payers dollars to guarantee these bogus loans. We are bailing them out. No other lenders will touch these loans but the government will back them. It's just greed...

Juan Diaz all it's doing is creating a bubble. 

Originally posted by @Corey Dutton :

That's not true. You can get a loan with 2 months paystubs (if you're in the same line of work). That's not a safe loan. Switching jobs is switching jobs.

Once again, home ownership is a privilege, not a right. FHA is trying to make it a right and they are using our hard earned tax payers dollars to guarantee these bogus loans. We are bailing them out. No other lenders will touch these loans but the government will back them. It's just greed...

Well, I don't think home ownership is either a privilege or a right. It's an option to be considered, and it's big business for the many people involved in the process -- lenders, inspectors, real estate sales, the home improvement industry, construction, real estate attorneys, etc. Many FHA loans are made to responsible people who never default but still pay MIP each month, helping to cover those that actually default. MIP doesn't go away anymore like it used to, so that should help shore up the program as well.

I do pay 25% down on my investor loans. But I greatly appreciate not having to tie up that money in my personal residence, especially when it means my payment is $100s less than renting would be in the same area. So not only do I have those funds to invest elsewhere, making money instead of stuck in my home until I sell, but I also pocket over $300/month more than if I was stuck renting. Weighing the options available, it's a no-brainer. There are a million different ways to cherry pick what you personally think the government should back and what they shouldn't. You obviously don't like the FHA program. I obviously have a different opinion, and I'm happy this is not Germany where you say everyone rents. Being able to buy versus rent has made my entire family wealthier for several generations now, and I am thankful for it.

You've missed the point. It doesn't matter what you "think" or "believe," it's about what the government is perpetuating. Yes you're right, I don't like the FHA. It wouldn't hurt my business, in fact, it would help it. I'm a private money lender. These artificially low rates, all they've achieved, is building another bubble in many U.S. Cities. If you guys think this is fine and good, keep on herding with the sheep. Bahhh!!!! This nightmare we experienced called the great recession is just going to repeat itself all over again. That's ALL she wrote!

And if it does then we have another bunch of distressed houses to make money on. I don't see the problem.