FHA eases home warranty requirement for low down payment loans
The Federal Housing Administration is moving forward with a long-delayed plan to reduce the term of the home warranty required for high loan-to-value mortgages on new houses.
A 10-year protection plan that covers structural defects is no longer a requirement for certain loans on new homes that have down payments of less than 10%.
Builders must still provide a one-year warranty to protect the buyer against defects in the materials or work involved in constructing the home, and to provide assurances they built the dwelling as directed in submitted plans, according to the FHA.
"Making sure that borrower has that warranty is just going to be easier," said Rich Tucker, senior vice president of loan operations at Waterstone Mortgage Corp.
The change, which becomes effective starting with case numbers assigned March 14, could add to an upward drift in the share of new-home purchase applications submitted for FHA loans, and help first-time homebuyers who may lack the resources to make higher down payments.
Almost 18% of the new-construction purchase apps submitted by borrowers in February were for FHA loans, according to a Mortgage Bankers Association's index tracking that activity. In February 2018, the share of new-home purchase apps submitted for FHA loans was less than 16%.
The mortgage industry has been trying to get the Department of Housing and Urban Development to remove the FHA's 10-year protection-plan requirement for more than a decade.
Opposition by the home warranty industry blocked an earlier version of the proposal HUD tried to implement in the 1990s.
But the idea later re-emerged during the financial crisis as part of the Housing and Economic Recovery Act of 2008. HERA technically eliminated the statutory basis for the requirement, but HUD still elected to keep it in place for several years.
By 2013, HUD had determined that there were enough advances in construction quality and building code enforcement to mitigate its concerns about the need for longer-term protection from structural defects, and the department revisited the idea of rolling back the home warranty requirement.
Comments generated in response to HUD's most recent reproposal of the rule included a mix of support and opposition, according to the December 2018 final rule on the revised requirements.
The comments included fears that current building standards, codes and enforcement still aren't strong enough to remove the 10-year protection plan, and that its removal could expose HUD and the African-American and Latino borrowers who take out a large share of FHA loans to increased home defect risk.
HUD declined to revise the rules in response to these comments, noting that its records "do not document that a claim has ever been made against the warranty in discussed in this rule that resulted in a subsequent claim to HUD for unresolved repairs, damages or foreclosure."
The department also noted that while the rule removes the 10-year plan as a mandate, it "does not prohibit borrowers who desire, and are able to afford, the extra protection from purchasing warranty protection plans."
The one-year warranty that remains a mandate covers a period that starts whenever the earliest of the following events occurs: conveyance of title to the buyer, the completion of construction, or occupancy.