The 800,000 home buyers who use the federal government's largest housing finance program every year appear to be on the verge of getting a level of consumer protection that other home buyers lack: mandatory home inspections prior to purchase with a three-day legal right to bail out of the deal.
Under legislation now heading for action in the House, no one can buy a home more than 1 year old with a Federal Housing Administration mortgage without first obtaining a detailed, professional inspection and report on the "physical structure and systems" of the property.
The cost of the mandatory inspection would be no higher than $300, and that amount could be rolled into the mortgage balance.
The inspectors would have to be chosen by the home buyer from an FHA-approved list of qualified inspectors in the area. Those inspectors in turn would have to perform their work according to the standards of the largest professional organization in the field--the American Society of Home Inspectors--or other "equivalent" standards prescribed by the FHA.
The bill, which passed the housing subcommittee unanimously and should see House floor action this month, would attempt to remedy one of the most glaring weaknesses in the current FHA mortgage program: repeated, and often tragic, instances of buyers moving into houses riddled with defects that a professional inspection would have identified.
Last year the FHA paid insurance claims on 71,599 defaulted home loans nationwide--many of which involved properties in such poor condition that buyers couldn't afford to repair them.
The pending legislation would have special significance this year because Congress is likely to expand the reach of the FHA program by increasing the maximum mortgage limit to $197,620, up from $170,362.
That increase is likely to pump up the volume of FHA loan activity in higher-cost markets such as California and the Northeast.
Mandatory inspections would give FHA borrowers an extra measure of protection that they badly need, according to consumer groups supporting the change.
Liz Ryan, a housing specialist at the Chicago-based neighborhood advocacy group National People's Action, said "right now [FHA borrowers] get nothing" except an appraisal that makes little effort to evaluate physical defects.
Lenders get 100% protection against loss when they use FHA mortgage insurance, Ryan said, "so why should it be that buyers get stuck with zero?"
But Ryan and other proponents have no illusions that mandatory inspections will cure all of FHA's problems with bad properties.
"This isn't going to be perfect," she says, "but it's better than nothing." In cases in which houses with defects that inspectors missed, "at least the consumer now will have some recourse" against the inspector.
Under current industry practices, home inspections are voluntary for both FHA and conventional (non-government) borrowers. Buyers who want them, and are prepared to pay for them, are free to build an inspection contingency into the purchase contract.
Mortgage lenders and real estate brokers--and the FHA itself--prefer to leave it that way and oppose the pending bill.
The FHA, for its part, has drafted a new "valuation conditions" form that it plans to require appraisers to deliver buyers.
Although the draft form emphasizes that it "should not be considered as an inspection," it would force appraisers to identify obvious defects in a lengthy list of mechanical and structural features of the house.
The home purchasers can then demand that the seller correct the problems, and hire an inspector to make sure the work has been properly completed.
Ira Peppercorn, a top official at the FHA, said that mandating inspections will cost home buyers a lot more money--a total of an estimated $250 million a year--and will increase government involvement in home sale transactions.
He also questions whether there are enough trained, competent inspectors around the country to deliver 800,000 mandatory FHA inspections a year.
Realtor and mortgage banking trade groups oppose the bill as well, arguing that it will needlessly gum up FHA sales transactions, and make low-down-payment FHA loans less competitive in the overall marketplace.
Whatever the case, by later this year FHA loan applicants are likely to get beefed-up protections against physical defects in the homes they buy--either through tougher FHA appraisal standards or congressionally mandated inspections.
In the meantime, here's some bottom-line advice for anyone buying a house:
Get it inspected by a competent professional, and accompany him or her on the inspection, so you know what you're buying.
Don't shop for an inspector on the basis of price quotes alone. The least-costly inspectors often prepare the least-detailed, check-the-box-type reports, and spend little time truly examining your house.
Distributed by the Washington Post Writers Group.