Your Mortgage : HUD Imposes New Restrictions on FHA Loans : Housing: Agency adopts virtual ban on financing single-family rentals and tougher standards for assuming other loans.
The U.S. Department of Housing and Urban Development has put new restrictions on many borrowers seeking loans insured by the Federal Housing Administration, including a virtual ban on loans for investors in single-family rentals and tougher qualifying standards for many buyers who want to assume an existing FHA loan.
The revisions “are going to have their biggest impact in less-expensive markets, like Riverside and San Bernardino, where FHA loans are quite popular,” said Sandy Sandison, an agent with Betty Landes Realty is Riverside.
The changes stem from a package of HUD reforms that was passed by Congress and signed into law by President Bush late last year.
The ban on new single-family home loans for investors was triggered by an unusually large default rate on loans that had already been made. About 15% of the loans made to investors in single-family rental property have gone bad, nearly five times the default rate for most other types of FHA loans.
“Something had to be done to reduce the default rate, and the ban on new loans to investors is a direct result of those efforts,” said Bill Glavin, a HUD spokesman.
The ban was also extended to investors who want to assume any FHA-insured single-family loan that was issued after Dec. 14, 1989.
People who plan on living in the home they buy can still assume an FHA loan even if it was issued after last Dec. 14, although HUD now requires that they undergo a “credit-worthiness review.”
When a buyer assumes a loan, he usually buys out the seller’s equity in the property and takes over the monthly payments.
For example, if the purchase price of the home was $100,000 and the seller had $20,000 in equity, the buyer would give the seller $20,000 and take over--”assume”--the monthly payments at the same interest rate.
Until now, most FHA loans were assumable by virtually anyone. Buyers didn’t have to pay thousands of dollars in fees to set up a new loan, and they didn’t have to go through the rigorous loan-qualification process.
Sellers, meantime, could often sell their properties faster because having an assumable loan makes a home more marketable.
Investors can still assume loans that were issued on or before last Dec. 14, although they must undergo a credit-check if the loan is less than two years old or if the seller wants to remove his liability for the loan.
In addition, the investor must undergo a credit-check if the lender demands it.
“If the lender finds that the investor isn’t credit-worthy, the assumption can be denied,” said Angelo R. Mozilo, president of Countrywide Funding Corp. and president-elect of the Mortgage Bankers Assn. of America.
Buyers who want to assume an FHA loan and live in the property must also meet tougher requirements.
For example, they must pass the credit-worthiness test if the loan was originated after last Dec. 14. The test includes an evaluation of their income, savings and credit history.
Besides having a good credit record, the new guidelines also recommend that no more than 29% of the buyer’s gross income should be used to make the mortgage payment and that no more than 41% of gross income should be allocated toward housing and other debts.
“The important thing to remember is that the 29% and 41% figures are recommended guidelines,” Mozilo said.
“Even if a borrower would have to pay 33% toward housing and 45% toward all their debt, he might still be able to assume the loan if he’s got a good credit record, been on the job for several years and has other good credit characteristics.”
Buyers who can’t pass the new credit-worthiness guidelines can consider hunting for a home financed by an FHA loan that was issued on or before last Dec. 14. Those loans generally don’t require credit checks unless the lender on the property asks for one.
Of course, cash-strapped buyers have several other alternate sources of financing:
* Increase the size of the down payment. Stocks, bonds, cars or other items can be sold to raise money. Individual retirement accounts and similar plans can often be tapped without penalty if the proceeds will be used to buy a house. Parents or friends might also be willing to help out.
* Take out a new FHA loan. Although investors can no longer get loans on single-family rentals, people who plan on living in their property still can. Rates on fixed-rate FHA loans currently stand at about 10 1/4%, and the down payment is typically about 5% of the purchase price. Although loan limits vary in different parts of the country, the limit in most urban areas is $124,875.
* Adjustable-rate mortgages. Since ARMs start out with a below-market interest rate, they’re usually easier to get than fixed-rate loans and sometimes require smaller down payments.
