Have You Heard About the New FHA?

The Federal Housing Administration (FHA) insured almost 1.4 million mortgage loans nationally in 2003. Those numbers fell to more than 816,000 loans in 2004, and fell even further in 2005 to about 523,000 loans. What happened?

FHA insures lenders against loss in the event of default by the borrower. FHA offered the nation’s first long-term, amortizing mortgage, with less restrictive credit policies and low down payments. Since its formation in 1934, FHA has insured more than 33 million mortgages.

In recent years, FHA has faced stiff competition from conventional and nonprime loans. FHA was slow to adapt its traditional property requirements and processing guidelines, which meant that in many housing markets, FHA had trouble delivering the fast, flexible processing that REALTORS® and home sellers expected. Many sellers and REALTORS® said, “no thanks, no FHA.”

The New FHA

The good news for sellers and REALTORS® is that FHA has completely revamped its repair and appraisal requirements and its policies on closing costs. The sale of a home financed with an FHA mortgage should no longer take more time, or cost the seller more money.

New FHA Property and Repair Requirements

Prior to 2006, FHA had its own appraisal form, its own property condition and repair standards, and other forms used only in an FHA loan transaction. This appraisal process invariably led to requiring a higher level of repairs than would be the case on a conventional loan.

While the higher repair standard was aimed at protecting the buyer, FHA realized that it couldn’t help borrowers who never get an FHA mortgage. It also realized that many of its repair requirements had very little to do with the basic safety and security of the property. Having its own forms and procedures also meant that changing a loan from conventional to FHA meant getting a new appraisal.

FHA has adopted Fannie Mae’s appraisal forms and protocols that are the industry standard. In addition to eliminating all FHA-specific forms and using Fannie Mae forms, FHA adopted the Fannie Mae repair standards. This means that FHA will no longer require repairs for minor items. Tests that were required by FHA for water quality, termites and flat roofs have all been eliminated.

Closing Costs

FHA has always had a specific list of “allowable” and “unallowable” closing costs. For example, the seller could pay the transaction or administrative fee charged by a REALTOR®, but the borrower could not. These requirements made an FHA borrower less attractive to a seller. Ultimately someone had to pay these fees, and too often the seller got stuck with them.

That’s all changed now. Earlier this year, FHA eliminated its list of allowable and unallowable closing costs. The only restriction now is essentially the same as that for other loans – closing costs must meet applicable federal and state disclosure regulations, and must be customary and reasonable for the area.

Streamlined 203(k)

FHA is complimenting these changes with an overhaul of its combination purchase/rehabilitation mortgage known as Section 203(k) (named after the section of the National Housing Act authorizing it). These changes make it easier to use.

The Section 203(k) program required an inspection of the home by a qualified inspector (a 203(k) “Consultant”), the development of a detailed work write-up and, usually, the services of a general contractor to oversee the work.  Repairs had to meet a minimum cost of $5,000. For major rehabilitation projects involving structural repairs or additions, these procedures still make sense.

For smaller projects, however, these elaborate procedures represented overkill, and served to discourage the use of the program. FHA developed the Streamlined 203(k) program. Under Streamlined 203(k), there is no minimum repair requirement and a cap of $35,000. Neither a 203(k) consultant nor a detailed work write-up is required. Like the original 203(k) program, all repairs are completed after the loan closes.

The program is aimed at completing repairs that may be too expensive for homeowners to take on out of their own pockets, but which are relatively uncomplicated.

The new appraisal protocol should eliminate the need for minor repairs. When more serious repairs are needed, Streamlined 203(k) provides the homebuyer with an option to accomplish the repairs without costing the seller any money or delaying closing.

Why the Changes?

FHA is making these changes because alternative loan products may be readily available, but they may not be the best product for the borrower.

For information on FHA loans, visit FHA’s web page for real estate professionals at www.fha.gov/groups/brokers.cfm. Many of the changes referenced in this article, as well as FHA handbooks, forms, and other information, can be found at www.hudclips.org.