FHA loans now more competitive
The FHA once dominated the lower-cost
segment of the national housing market as it offered buyers with little
to no down payment or those with credit issues the opportunity to
purchase a home.
However, FHA rules required painting, patching,
repairs and inspections before the mortgage could be closed?even if the
defects were minor and did not affect health or safety. As applicants
generally had just enough money for the down payment, the financial
burden of repair fell to the seller.
During the housing boom in
2004 and 2005, sellers could afford to reject purchase offers that came
with FHA mortgage financing contingencies.
As a result, the
FHA's share of the overall market plummeted to a record-low 3 percent,
down from 11 percent less than a decade earlier.
In an effort to be more competitive with conventional loans, FHA has made some interesting changes over the last few months:
Minor repairs no longer required
in mid-December, the agency said it would no longer require the repair
of minor cosmetic blemishes. Prior to that, FHA rules required that
someone?either the buyer or seller?fix such non-life threatening
problems as cracked window pains, dripping faucets, soiled or poorly
installed carpeting, missing handrails on stairways, cracked wallboard,
cracked sidewalks or worn flooring finishes.
The agency continues to require that serious structural problems and systems defects be fixed prior to closing.
Mandatory inspections waived
FHA also announced that previously mandatory inspections for a number
of property conditions also have been waived. These include:
and other insect damage problems, unless there is "evidence of active
infestation" or local regulations require inspections.
Septic systems where there is no evidence of malfunction.
Wells that are functioning normally and show no signs of contamination.
Buyer can finance cost of repair
improvements were also made to FHA's Streamline 203(k) Limited Repair
Program which allows buyers to roll the cost of minor repairs -
replacing warn out appliances and tattered carpeting, for example - into
their governmentinsured mortgage without the need for a second
This was yet another attempt to overcome the
reluctance of many sellers to accept contracts that called for
FHA-insured loans because appraisers were requiring sellers to make what
they considered to be nit-picking repairs or major fixes they didn't
want to make.
Streamline K gives the borrower the opportunity to
make repairs their way instead of being at the mercy of sellers who
tend to do only what it takes to get by, including using low grade
products to minimize their own expense.
Introduced in April
2005, the original program permitted the borrower to add $5,000 to
$15,000 to the loan amount to make repairs. However, after finding the
maximum of $15,000 to be a deterrent, a new maximum of $35,000 was
released in early January.
The "limited repair" loan is a
streamlined version of the agency's 203(k) renovation loan program that
allows borrowers to roll the cost of major repairs into mortgages that
are based on the "as completed" value of the property.
For more info, contact your local FHA lender or visit www.hud.gov/offices/hsg/sfh/203k/203kslrp.cfm.
Lender requirements softened
a major change that took effect Jan. 27, FHA eliminated prescribing
borrower's paid closing costs and now allows lenders to collect from
borrowers any "customary and reasonable costs" that are part of the
Under the new rules, the government still
will not allow lender's to mark up the charges; that is, to pay a vendor
one price and charge the borrower another, higher price. Only the
actual cost for the service may be charged.
Due to existing
requirements, however, the FHA also will not allow borrowers to be hit
with a tax service fee. Nor can they be charged with more than a 1
percent origination fee (2 percent on Home Equity Conversion Mortgages).
And the maximum seller contribution to the buyer's costs remains capped
at 6 percent.