Estate and mortgageFHA Relaxes Property and Fix-up Rules
A major new streamlining of property condition and repair rules by the Federal Housing Administration could be excellent news for thousands of moderate-income home sellers and buyers -- and their realty agents -- across the country.
As the government"s largest mortgage program, the FHA traditionally has been a key low-downpayment resource for first-time buyers with less than perfect credit. But in recent years the FHA has also been criticized for overly-bureaucratic rules and glacial processing times. Among its most controversial regulations have been its stringent property condition and inspection rules for resale homes, which required sellers to repair even the most minor property defects before the FHA would insure a would-be purchaser"s loan.
In fast-moving urban markets during the boom years of 2003-2005, realty agents often advised sellers to ignore or reject purchase offers that carried FHA financing contingencies. With no-hassle subprime mortgage money readily available to buyers, agents reasoned, why complicate a sales transaction with potentially costly and time-consuming cosmetic repairs?
FHA rules prohibited financings where the property had cracked window panes, cracks in sidewalks, signs of "poor workmanship," defective floor finishes, leaky faucets, worn out or buckled carpeting, missing handrails on staircases, among others. Not only did sellers have to pay for repairs when their purchasers applied for FHA financing, but they had to submit to reinspections -- all of which ate up time and sometimes killed the sales transaction altogether.
But now FHA says it has purged itself of its old, nit-picky property condition rules. In the words of FHA Commissioner Brian D. Montgomery, the 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."
In his letter to lenders, Montgomery also announced streamlined new procedures eliminating once-mandatory termite and pest inspections, septic system and well inspections even when no observable infestation or contamination was evident.
Montgomery"s policy changes are designed to help FHA win back its traditional share of the U.S. mortgage market. FHA accounted for 11 percent of all home loans as recently as 1997, but saw that share steadily dwindle in recent years to an estimated 3 percent for 2005. Montgomery and HUD Secretary Alphonso Jackson conceded last year that FHA"s decline was directly attributable to realty agents" and lenders" perceptions of it as overly bureaucratic and "a pain to deal with."
During the past six months, FHA has embarked on an aggressive campaign to attract new loan volume by reinventing itself. It has introduced new loan programs, put greater underwriting decision making in lenders" hands to speed up processing, streamlined its appraisal rules by adopting Fannie Mae"s widely-used forms, and has now reached out to its realty brokerage critics by easing property condition and repair standards.
Under the revised rules, property defects that could affect "health and safety" must still be corrected in advance. But everything else below that threshold must merely be noted by appraisers, not fixed in advance by sellers.
Combined with FHA"s generous new mortgage limits for 2006 -- up to $362,790 in high cost markets and up to $200,160 elsewhere -- FHA financing should get renewed attention by sellers, Realtors, builders and buyers in the coming months. FHA loans require no specific credit score levels and never carry prepayment penalties. Better yet, FHA often offers significantly lower interest rates than subprime loans priced to consumers with comparable credit risk.
"We"ve got a superior product" in comparison with most alternatives, says HUD Secretary Jackson. "We need to reach out" to African-American, Hispanic and other home buyers to show them that FHA now "offers a much better deal."