Personally, I would never lend to anyone that only had 3.5% to put down. I think it goes without saying that with less skin in the game people are more likely to walk.
However, I think the whole point is to have a loan product that is available to those with a minimal down payment so that we can work towards getting the person that is not paying out of the home and someone that will or might pay their mortgage in. Of course there is a higher risk than someone with 10 or 20% down. It would be ideal if everyone could go conventional (they would also get a better rate!), but the pool of people that can and will in this market is not equal to the number of homes available. I would not blame FHA for providing “an” option even though we all know it’s not the best option.
The alternative would be to tell everyone they need to put more money down, since they dont have it they would not be buying. The prices would go down which would be good for those who have not bought, but would be detrimental to the responsible people in that neighborhood that put more money down and have been paying their mortgage.
There will always be responsible people that follow through with what they say they will and those who do not.
