Undisclosed Mortgage Fees Costly To Consumers, Lenders

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

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, D-Utah, 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 convince a parent or grandparent to loan them the down-payment dollars - with or without interest charges - for some period of time.

Under current rules, 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 home buyers, 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 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 also approved by the House:

First-time home buyers 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. Under current rules, realty agents and lenders - to say nothing of home buyers - 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. Under current law, mortgage-insurance certificates must be issued directly from the Department of Housing and Urban Development (HUD).

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 of doing business with the government would be lower.

The bottom line here 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.

(Copyright, 1996, Washington Post Writers Group)