New FHA Rules Increase Cost of Buying a Home


New rules took effect Monday that will require thousands of home buyers using Federal Housing Administration mortgages to provide more cash when they sign the final purchase papers and pay higher monthly charges for insurance on their loans.

The regulations could drive many young buyers from the housing market, the Mortgage Bankers Assn. said Monday, calling on the government to repeal the higher costs. But federal officials said the higher charges will help replenish the guarantee fund for mortgages.

The changes, which cover all future contract settlements on houses bought using FHA financing, have already angered some home buyers. “It’s just too much, man,” said a Walnut, Calif., resident who is in the midst of buying a $103,000 home in Adelanto.

The buyer, who asked not to be identified, said Monday that he must produce as much as $2,000 in cash at the contract closing, and his monthly payments will jump $41.18. He put down $6,500 for his home and says he is hard-pressed to come up with any additional funds.


“I’ve got to spend $1,500 for landscaping and a fence, and I need a garage opener and a patio slab,” the 27 year-old warehouse worker said. “This kind of thing will knock off a lot of people who want to buy a home.”

The FHA guarantees mortgages to help low- and moderate-income people buy homes. Lenders are willing to participate because the federal government will repay the loan if the homeowner defaults. The FHA handles more than 700,000 mortgages a year, according to federal officials.

The typical FHA mortgage is $65,000, but it ranges up to $124,875 in high-cost areas such as Southern California. Most buyers make down payments of less that 10% of the purchase cost. Under the old rules, the amount borrowed could include all of the closing costs associated with the sale of a home, as well as the premium to pay for the federal insurance protecting the mortgage.

However, the new rules require the buyer to pay 43% of the closing costs at the time of purchase, and to pay a monthly fee--0.5% of the loan--for insurance.


The FHA moved to change the rules because the mortgage guarantee fund was under pressure.

With home prices dropping in some areas of the country, owners were walking away from their properties because they had little of their own money invested. FHA reserves dwindled to $2.6 billion to provide guarantees for mortgages totaling $250 billion. The FHA goal is to rebuild reserves to equal 2% of the value of the mortgages.

The Mortgage Bankers Assn. of America said as many as 100,000 people will be unable to afford homes because of the higher FHA charges. The FHA “has put all the emphasis on safety and soundness of the insurance fund,” Warren Lasko, the group’s vice president, told a news conference. "(They) have forgotten their basic purpose--to help people buy their first home.”

The new rules “set up a vicious cycle” in which the price of a home may be forever beyond the ability to pay of thousands of Americans, Lasko complained. “Young people can’t save enough this year . . . next year they need an ever bigger down payment, and they may be permanently frozen out of the housing market.”

He said the impact will be “disproportionate” on minority group members, many of whom have lower incomes. The mortgage bankers want the FHA to repeal its new rule on closing costs. Changing the insurance formula would require congressional action.

But the Department of Housing and Urban Development, which runs the FHA program, disputes the mortgage bankers’ claims that many people will be driven from the housing market.