Actually, the HUD was immediately sued over this rule, and the rule was stayed the same day as it was made, pending litigation from the downpayment assistance programs.
The stay was originally temporary, but as of 3/5/08, the judge made it permanent, ruling that the HUD was unlikely to prevail in their arguments. All downpayment assistance programs that meet IRS guidelines for operating as chartered still are available.
Whether or not the downpayment assistance programs are a good idea (they’re not, if you can’t save 3% of the home’s value that you’re buying – and relatively quickly at that, you probably have no business buying that home), they are still legal, and that is unlikely to change anytime soon.
On the original posters question though, the seller won’t GIVE you that 3%, it’ll be tacked onto the house (if they were willing to give it to you, you could just as easily have bargained it down that 3% + the $500 or so fee the downpayment service charges, which is paid by the seller). In addition, as you noted, you’d be on the hook for the 1.5% up front MIP that the FHA charges for their loans, as well as the 0.5%/year mortgage insurance that they require. With 20% down, you avoid both those charges under a standard mortgage, along with the lower monthly payment. Unless you’re planning on walking on the mortgage, in the longer run, it’s probably better to do the 20% down.
