FHA ups size of loans requiring little down Loan ceiling is raised to $197,621 in areas such as Baltimore

Nation's Housing

October 18, 1998|By Kenneth R. Harney

FIRST-TIME homebuyers -- especially those with limited cash on hand -- are likely to be the primary beneficiaries of congressional legislation passed Oct. 8 that expands the reach of the federal government's largest mortgage program.

Under the new legislation, the Federal Housing Administration (FHA) will be able to insure low-down-payment home loans as large as $197,621 in nearly three dozen "high cost" metropolitan areas across the country. FHA loans in most other markets will get a new upper limit of $109,032 -- up from the $86,317 limit currently in effect.

That means that even in real estate markets with the highest median home prices, first-time buyers should now be better able to use the easier credit qualifications and minimal down payments allowed by the FHA compared with conventional mortgage sources.

Up until now, in places like San Francisco, metropolitan Baltimore, Washington, Seattle, San Diego, Los Angeles, New York, New Jersey, Connecticut and eastern Massachusetts, FHA buyers were limited to loans no larger than $170,362. That ceiling effectively cut many would-be borrowers out of the FHA orbit because even modest townhouses sell for more than that amount.

But with a revised loan limit close to $200,000, builders, real estate agents and lenders say FHA should become a live option again for thousands of first-timers.

Who should take a hard look at FHA, and why? Here's a quick overview for people thinking about their first home purchase. You need to know upfront that the FHA program has distinct minuses along with the pluses.

On the plus side:

* Low down payments, as low as 3 percent, with options that allow financing your mortgage insurance premium and closing costs by including them in the loan amount. Some FHA financings get close to 100 percent of the home sale price. Higher-balance loans carry slightly larger equity contributions upfront, but the fact remains: Other than Veterans (VA) loans, you generally can't buy a first house with a much smaller down payment than via FHA.

* More generous tolerances regarding your other debts. FHA rules allow your housing-related debts to go up to 29 percent of your income, and your total household debt level, including car loans, credit cards, student loans, etc., to go to 41 percent of income. That compares with the general standard in the conventional loan market of 25 percent to 28 percent of income for mortgage debt, and 33 percent to 38 percent of income for total household debt.

Put another way: FHA underwriting guidelines assume that applicants are younger, newer to the workplace, and more likely to be saddled with higher debt loads than borrowers in the regular market. In fact, a full 70 percent of FHA's 800,000 borrowers each year are first-time borrowers, 40 percent are minorities, and large numbers obtain pre-purchase counseling before their transaction. FHA functions like a massive national intake pipeline for turning renters into homeowners.

On the negative side:

* FHA is an insurance program run by a federal bureaucracy. As documented by a seemingly unending series of federal investigations, the FHA program is open to abuses by appraisers, inspectors, lenders, real estate agents and others. Those abuses frequently have resulted in unsuspecting first-time purchasers moving into FHA-financed houses that are riddled with defects that a proper inspection -- or appraisal -- should have detected.

The appraisal nightmares have been particularly intense, symbolized by the continuing plight of first-time buyers Lori and Myles Kehs of Orefield, Pa., who purchased a home with an FHA mortgage in September 1996.

Their appraiser, chosen by a local lender, gave the property a clean bill of health and a high dollar valuation despite what an investigation by the Department of Housing and Urban Development later determined to be significant "health and safety hazards" that should have been reported by the appraiser. The Kehs' home has an unstable foundation, a malfunctioning sewage system, numerous electrical code violations, roof problems, and a long list of other defects.

The Kehs estimate the cost to them of correcting the problems to be $50,000 or more. Though they've complained directly to HUD Secretary Andrew M. Cuomo and been promised financial help, they've never received a cent from the appraiser, the lender or FHA, which HUD oversees.

Their appraiser, however, has been suspended from doing FHA appraisals, and congressional Republicans are pushing legislation requiring property inspections for all FHA loan applications.

The bottom line on the new mortgage increases for potential FHA borrowers: Take a hard look at the potential benefits of using FHA to buy a first home. But look hard, too, at the physical condition of the property you're signing up for, and get a professional inspection by a firm independent of the real estate agent or lender, just to be safe.

Pub Date: 10/18/98

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