Homebuyers wouild have to pony up a 5 percent down payment instead of the current 3.5 percent required for an Federal Housing Administration-insured loan if proposed legislation gets passed. In practical terms, that would mean a borrower who wants a $300,000 house would need a minimum of $15,000 for a down payment instead of the current $10,500.
On Long Island, coming up with the additional cash would be particularly onerous to would-be borrowers because property tax escrows and the New York State mortgage tax create very high closing costs here, says Lynne Law of the Long Island Housing Partnership. “For prospective homebuyers to have 5 percent down and have all their closing costs is difficult,” says Law.
A draft of the bill was presented by Republican lawmakers Wednesday at a hearing before the Subcommittee on Insurance, Housing and Community Opportunity. The GOP contends that the move would reduce the government’s involvement in the housing market and protect the agency’s reserves.
The Federal Housing Administration, which insures lenders against the risk of default, operates at no cost to taxpayers: The agency is funded entirely by the proceeds from the mortgage insurance premiums paid by the homeowners. But some lawmakers argue that the low down payments increase the risk that the agency might need a government bailout.
That argument is not entirely without merit, says Law. “The reality is the greater the down payment and the more the borrower has invested in the property, the more seriously they take the payments. No one is careless about that when they have a real investment in the property.”
However, the higher cost could shut out credit-worthy buyers – those with a good income and a history of paying their bills on time -- at a time when home ownership on Long Island was finally becoming affordable, thanks to low home prices and interest rates. “Hard-working people with reasonably good income can now look to buy houses … It’s not totally out of reach to everyone anymore.”
FHA-insured loans have become an increasingly popular alternative as the qualifications for conventional loans have gotten stricter. Raising the FHA down payment requirement could tip the scales back in the other direction and hurt the local housing market, she says.