The Federal Housing Administration is continuing to make major strides in its effort to make government-insured financing more relevant -- and more competitive with conventional funding.
In recent weeks, the agency toned down its rules about mandatory repairs. Then, it upped the ante on its new "quick fix" renovation loan program. And now, it is no longer dictating to home buyers what closing costs they can and cannot pay.
Under a major change that took effect Jan. 27, lenders may now collect from borrowers any "customary and reasonable costs" that are part of the settlement process.
FHA Commissioner Brian Montgomery says the move is intended to "align (the agency's) business process with industry practice."
"FHA believes that by no longer prescribing borrower's paid closing costs, a significant impediment to the use of its programs has been eliminated," says Montgomery.
"FHA-approved mortgagees advised us that sellers sometimes balked at accepting a sales contract from a buyer wishing to use FHA-insured financing because it's guidelines differ from standard practice and do not consider regional variations. The unintended consequence was that the buyer was then forced into a less suitable and often more expensive mortgage product."
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," says Montgomery.
But the change does eliminate geographic disparities for lenders who operate on a national basis.
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.
The elimination of the closing costs rules comes on the heels of other steps by the FHA, perhaps the most significant of which came in mid-December, when 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.
Though the agency looked at its repair rules as an important consumer protection, buyers tended to demand that sellers pay the freight. And as a result, sellers often rejected offers from buyers who planned to finance their transactions with FHA-insured loans.
The agency continues to require that serious structural problems and systems defects be fixed prior to closing. But it no longer sweats the little things.
Meanwhile, under a "new and reconstituted" version of a loan program introduced by the agency just last spring, buyers can now roll the cost of minor repairs -- replacing warn out appliances and tattered carpeting, for example -- into their government-insured mortgage without the need for a second mortgage -- or the need to dip into the old bank account to pay the freight.
Designed to move "as is" fixer-uppers off the for-sale rolls and into the hands of new and credit-worthy owners, 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.
"Realtors should be all over this," says Jane King, vice president of Irwin Mortgage Corp.'s Renovation Lending Division. "It's a good product."
Streamlined K was first introduced in April, again 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.
"Appraisers were coming back with so many annoying conditions that FHA financing had problematic," King says.
As usual, though, Uncle Sam missed the mark by requiring borrowers to make at least $5,000 worth of repairs to qualify, but limiting the cost of the work to $15,000. In early January, though, the FHA eliminated the minimum altogether and raised the maximum to a more substantial $35,000.
"We canvassed the industry and found that $35,000 was a more realistic figure," says Bill Glavin, special assistant to FHA Commissioner Montgomery, who conceded the original program failed to meet the government's expectations.
Now, says Irwin's King, FHA borrowers will no longer be "held hostage" to whatever condition the house is in, or at the mercy of sellers who either refuse to make the required repairs or do as little as possible to get by.
"It gives the borrower the opportunity to make repairs their way and in their time frame, and the seller doesn't have to do a thing," says the 16-year veteran of renovation lending. "You no longer will be at the whim of sellers who make minimal repairs, such as replacing dog-stained carpeting with the lowest grade product they can find."
