Congress Tinkering with FHA Loan Guidelines – A Mess in the Making?

50% or so of all mortgage loans currently being made are FHA loans. Why? Because the terms and down payment requirements are less stringent and cumbersome than other types of loans.

Here are the current guidelines for FHA Loans:

• As little 3.5% down payment
• Borrowers can get up to a 6% credit from sellers against closing costs
• Borrowers can have substandard credit and still qualify

Here are proposals being floated in Congress for changes:

• Change the down payment to 5%
• Reduce seller closing cost credit to 3%
• Credit worthiness requirements will need to be increased

Now the reason for the changes makes some sense. The US Government guarantees the loans against default. So lenders get their money back in case of default. The attempts by congress are to reduce defaults. However, this actions seems counter to the give away of $8,000 in tax credits for first time home buyers and others who qualify.

On one hand money is being given away, while on the other hand a major source of financing for the first time home buyers will be harder to get. One hand wants to stimulate, the other hand wants to slow things down.

I really don’t know what’s right in the long-term. It’s probably better to reduce defaults, but the law of unintended consequences will probably rear its ugly head. Congress never seems to learn the lesson of keeping their hands off what is working.

If we are in a recovery, and some signs are pointing that way, why mess with it now. Wait until the economy is strong and then tinker with a few things. Right now, it’s probably better just to leave it alone.

Sales of Daytona Beach condos and Daytona Beach homes have rebounded significantly this year. Sales in Florida and around the country are doing the same in most places. Slowing down any part of the economy that is improving makes no sense to me at this time.