Will Republicans be Successful at Raising FHA Down Payment?

As if it isn't difficult enough right now to get a home for a first-time homebuyer, Republican legislators want to pass bills that will make it even more difficult.

The Financial Services Committee, which is currently led by the Republicans, would like to raise the minimum down payment for a home purchased through the FHA from its current rate to no less than 5 percent. In addition to that, the FHA-Rural Regulatory Improvement Act of 2011, which is the draft legislation, would also not allow buyers to finance their closing costs.

According to Spencer Bachus, the House Financial Services Committee's Republican Chairman, this bill is coming at a good time because it addresses "government guarantee programs that could expose taxpayers to significant losses."

However, there are many in the mortgage industry who say this isn't the right move right now. The Chairman of the Mortgage Bankers Association, Michael Berman, said that down payments do not always indicate which borrowers are going to default on their mortgages. While the amount of the down payment is one factor in determining a default risk, there are more important factors, such as credit scores, job security and more.

Berman said that the current down payment requirements for FHA borrowers is enough to give the borrower a stake in their purchase. As long as buyers under this program undergo strict underwriting requirements which include income verification and other documentation helps buyers "responsibly become, and stay, homeowners."

Ron Phillips, the President of the National Association of Realtors, also disagrees with the hike in the down payment requirements. He also says that the amount of the down payment is not as accurate of an indicator in loan performance as the underwriting. If the down payment for an FHA mortgage is increased, he believes it would not do anything except "disenfranchise many creditworthy homebuyers."

Still, government entities and legislators think it is necessary to change the down payment requirements and more. According to The Cato Institute, there are several reforms that need to take place in the FHA program in order to protect taxpayers, including the following:

The FHA must allow only reasonable debt-to-income ratios.Borrowers with a credit score between 600 and 680 must undergo pre-purchase counseling before being approved for an FHA mortgage.For borrowers with a credit score below 680, a 10 percent down payment will be required for a home purchase.

In addition to these requirements, the $625,500 mortgage loan limits would become permanent. There is a current limit of $729,750 which is a temporary limit for high-cost areas. This temporary limit is set to expire in September 2011 and the Obama administration has already expressed its unwillingness to support another extension of the temporary limits.

Do you think the mortgages taken out through the FHA should have a higher down payment requirement? Or is it going to make a lot of potential home buyers stay away from the market because they can't come up with the extra 1.5 percent (or more) of a down payment?