House votes FHA breaks for first-time homebuyers It would be easier for parents to help with down payment

Nation's Housing

July 07, 1996|By Kenneth R. Harney

WASHINGTON -- First-time homebuyers who are short of down-payment money would be the major beneficiaries of a series of changes to the Federal Housing Administration (FHA) mortgage program adopted by the House June 26.

The change with the most dramatic effect, assuming Senate approval later this summer: Parents and grandparents of FHA loan applicants no longer would be prohibited from lending their kids or grandchildren all or part of the down payment.

Sponsored by Rep. Bill Orton, a Utah Democrat, the amendment to FHA's rules would allow buyers who can afford the monthly payments on an FHA loan to acquire a home with almost no cash from their own savings, provided they could persuade a parent or grandparent to lend them the down-payment dollars -- with or without interest charges -- for some period of time.

Currently, family members are permitted to provide a monetary "gift" to FHA loan applicants to help with the down payment, but they can't ask for it back. Current rules require familial gift-givers to certify by letter that any cash assistance they've provided need never be repaid.

Since researchers have long identified the accumulation of down-payment dollars -- not the affordability of monthly payments -- as the single largest impediment to first-time homebuyers, the new rule should open FHA financing to thousands of cash-short consumers across the country.

Families who simply can't afford to give away $5,000 or more to their kids for a down payment now will be able to treat that money as an interest-bearing investment, possibly even as a lien secured by their kids' home.

The new rule gives parents or grandparents full latitude to craft their own terms for the loan.

They can charge whatever interest rate or other terms they choose. The only caveat: If the loan is to be a legally binding lien against the house -- like a mortgage lien -- it must be subordinated to the FHA's lien against the property.

In effect, the parents have to stand second in line to collect their share of the sale proceeds in the unhappy event of a foreclosure.

Three other significant changes to the FHA program were approved by the House:

First-time homebuyers would qualify to pay lower, upfront FHA mortgage insurance premiums. Rather than being charged the standard 2.25 percent insurance premium at closing, first-time purchasers using FHA would only have to pay a 2 percent premium. On a $100,000 loan, that would mean a $250 discount -- no small change to modest-income applicants who need every dollar to close the deal.

FHA's Byzantine down-payment calculations would be streamlined. Currently, realty agents and lenders -- to say nothing of homebuyers -- often have trouble following FHA's guidelines on loan-to-value ratios.

Here's why: Current loan limits are calculated as the lower of (a) 97.75 percent of the appraised value -- typically the sales price of the house -- excluding closing costs, or (b) 97 percent of the first $25,000 of price, plus 95 percent of the difference between $25,000 and $125,000, plus 90 percent of the amount over $125,000. Using the second computation, closing costs may be included in the calculation. Got all that?

The new and improved loan computation schedule would have just three categories: For homes valued below $50,000, the maximum loan amount would be 98.75 percent of value. For homes valued between $50,000 and $125,000, the loan ceiling would be 97.65 percent of value. For properties of $125,000 and over, the loan maximum would be 97.15 percent of value.

Loan-processing times would be cut by allowing lenders to issue FHA mortgage certificates on their own. Currently, mortgage insurance certificates must be issued directly from the Department of Housing and Urban Development. That, in turn, often leads to needless bureaucratic delays as the agency struggles with high loan volume and reduced staffing.

Thanks to this change, say mortgage bankers, more lenders should be willing to recommend FHA loans to consumers because the hassle factor of doing business with the government would be lower.

The bottom line for consumers if the House-passed amendments -- all supported by the Clinton administration -- become law this year? Look for a reinvigorated campaign to reach out to modest-income, potential first-time buyers via the FHA program.

And look for more consumers to check out the new FHA -- lower cash requirements upfront, faster turnaround times -- and say yes to buying a home with an FHA mortgage.

Pub Date: 7/07/96

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