Down Payment Requirement Won’t Keep FHA-Backed Loans from Defaulting

Published

April 15, 2011

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In the near future, consumers who want their home loans insured by the FHA will have to pay 20 percent of their mortgage agreement as a down payment, according to a report from Bloomberg News. However, many financial experts say that the size of a down payment is in no way indicative of future default risk, and the new rule could keep otherwise creditworthy consumers from buying homes.

“This definition has the potential to create false- positive situations,” Acting Federal Housing Administration Commissioner Bob Ryan told lawmakers, according to the news source.

Originally, the rule was designed to ensure that banks issuing these home loans retained enough risk of their own to prevent another mortgage crisis, the report said. However, the quality of a loan is often the result of the approved borrower’s credit history rather than the size of their down payment. FHA-backed home loans with 5 percent down payments from borrowers with poor borrowing records perform “significantly worse” than similar loans to those with better credit.

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One reason for the mortgage meltdown was that too many home loans were extended to subprime borrowers who could not afford to pay them.