FHA eases home buying rules using its low-interest loans
Published: Saturday, January 14, 2006 at 6:01 a.m.
Last Modified: Saturday, January 14, 2006 at 12:00 a.m.
WASHINGTON - The federal government's biggest home mortgage program streamlined itself at the end of December, and that could be good news for buyers, sellers, realty agents and builders in 2006.
In fact, the Federal Housing Administration's decision to eliminate or soften many of its onerous rules about property conditions and mandatory repairs should be a stimulant to the entire housing market this year. It could help open low-down-payment mortgages with no prepayment penalties to thousands of first-time, moderate-income purchasers who might have turned to higher-fee
`subprime" alternatives instead.
Those new buyers, in turn, could provide sellers of lower-cost dwellings the cash to move up to more costly properties - prompting more sales activity at successive levels up the housing price ladder.
The FHA once dominated the lower-cost segment of the national housing market, and was a crucial entry point for young, minority and lower-income purchasers. But in recent years it has been heavily criticized for enforcing decades-old, overly paternal requirements about property
condition and repairs of resale houses. In the boom markets of 2004-2005, realty agents often advised sellers to reject purchase offers that came with FHA mortgage financing contingencies.
Whereas buyers using other forms of financing could buy houses
`as is," 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. FHA-contingent offers were viewed as too troublesome to bother with, and realty agents, lenders and sellers in some urban areas effectively boycotted the program. Meanwhile, FHA's share of the overall market plummeted to a record-low 3 percent, down from 11 percent less than a decade earlier.
Thanks to a clean sweep of its rules last year, capped by revised repair and inspection standards outlined to lenders at the end of December, realty agents and home sellers might begin to take a fresh look at FHA as an alternative. Buying a house with FHA financing no longer will put bidders at a competitive disadvantage.
In a Dec. 19 letter to hundreds of lenders across the country, FHA Commissioner Brian D. Montgomery announced that his agency
`has shifted from its historical emphasis on the repair of minor property deficiencies and now only requires repairs for those property conditions that rise above the level of cosmetic defects, minor defects, or normal wear and tear."
Before the policy overhaul, FHA required advance repairs on resale homes for defects such as:
More serious defects on resale houses, such as structural problems, foundation damage, bad roofing and electrical hazards that pose more serious risks to buyers still will be subject to a mandatory repair rule.
FHA also announced that previously mandatory inspections for a number of property conditions have also been waived. These include:
`evidence of active infestation" or local real estate regulations require
FHA's streamlining of property rules is part of a much broader effort within the agency to regain its previous role in the national real estate marketplace. Last year Montgomery and federal Housing Secretary Alphonso Jackson said they now agreed with critics who said FHA rules and procedures were out of date. More importantly, said Jackson, FHA had an important traditional mission to uphold to ease the way for lower-income and minority renters into homeownership through low down payments and generous credit and debt ratio standards.
`We need to reach out" to African-American, Hispanic and other consumers with better loan concepts, less red tape and faster mortgage approvals, he said. Jackson argued that in comparison with most subprime loans, FHA
`offers a better deal. We've got a superior product." - lower interest rates, lower fees, no prepayment penalties and mortgage limits up to $362,790 in high-cost urban areas and $200,160 in others.
The latest rule changes may not get rid of all the boo-birds - afterall, FHA is a government-run insurance program - but it should get the attention of buyers and sellers in the moderate-cost segments of the market, along with the realty and lending professionals who work with them.
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