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FHA Places New Premium On Condo, Rehab Loans

The Federal Housing Administration has directed its lenders to start charging upfront insurance premiums on condominium loans and 203(k) purchase/renovation loans next year.

All condo and 203(k) loans closed on or after Jan. 1 are subject to the 1.5% upfront premium, according to a FHA mortgagee letter.

Congress imposed the upfront premium so these loan products would be self-sufficient and not subject to temporary shutdowns that have plagued the FHA program in recent years. The upfront premiums can be financed into the loan.

Even with the upfront premium, FHA 203(k) loans are "still the best buy in town," said Jane King, vice president of renovation lending at Irwin Mortgage Corp.

"You can't get renovation loans at first mortgage rates, except with 203(k)," she said. Ms. King works out of Irwin's Clifton Park, N.Y., office.

A bigger problem for the FHA is that originations of these loans have declined precipitously over the past few years. While the condominium market has been red hot in many areas, FHA endorsements are down 51% as of Sept. 15 - with two weeks to go in the 2005 fiscal year.

Department of Housing and Urban Development data show that the FHA endorsed 27,842 condo loans in FY 2005, compared to 56,964 during the same period in FY 2004.

FHA endorsements of 203(k) loans, which allows homebuyers to obtain a first mortgage that includes renovation costs, are down 36% and will barely top 3,000 loans for FY 2005.

HUD recently introduced a streamline 203(k) to generate more business. The streamline product allows homebuyers to include $5,000 to $15,000 in the first mortgage to cover repairs identified in a home inspection or appraisal.

It was rolled out in late April and FHA officials are already considering changes to jump-start production.

At a recent lenders conference, FHA officials acknowledged that the new streamline product had generated only 47 loans. They are considering proposals to eliminate the $5,000 floor and raising the $15,000 cap. They also want to include refinancings and expand the list of eligible repairs.

Irwin Mortgage has started to offer the streamline 203(k) through it retail branches in various states and the loan officers like it, Ms. King said. "They like it a lot," she said. Irwin Mortgage also has a correspondent channel.

The renovation loan expert believes the FHA's streamlined 203(k) program is a positive development that will catch on with real estate agents and lenders. "We are anxiously awaiting the changes," Ms. King said.

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