Federal Housing Administration loans come with a variety of qualification requirements. At one time, one of those requirements was that you purchased a 10-year home warranty if you wanted to use your FHA loan on new construction. The FHA has lessened those requirements, allowing homebuyers to qualify for a loan with only a one-year warranty, as long as you have a copy of the building permit and the certificate of occupancy.
Warranty FHA Requirements
When you buy a newly-constructed home, you rely on the builder to have made no costly errors. For this reason, builders offer a one-year Warranty of Completion of Construction, which protects the homeowner if anything goes wrong within the first year. Under this one-year warranty, the builder promises to repair, at his own expense, any defects covered under the warranty.
Previously, the one-year warranty wasn’t sufficient for those using an FHA loan to purchase the home. The FHA required borrowers to have a 10-year warranty in order to qualify for financing. However, the FHA has streamlined its requirements, eliminating the 10-year warranty requirement in most cases.
Current FHA Requirements
There may no longer be a 10-year warranty requirement, but the FHA still wants to protect its investment. If you’re buying new construction, the builder will need to issue a Warranty of Completion of Construction in order for the borrower to qualify for FHA mortgage insurance. You’ll also need a copy of the building permit and a copy of the final certificate of occupancy.
Your builder should be able to provide all of the necessary documentation. The Warranty of Completion is submitted by filling out HUD-92544, which is available online. HUD-92544 covers all of the protections the FHA needs to issue a loan, including certifying that the property is free of defects and that the builder will cover those defects for a period of one year.
The FHA also eliminated the requirement that lenders choose inspectors from a list of approved vendors maintained by HUD. The agency stated that industry standards and regulations ensure that lenders can choose their own inspectors. Homeowners who choose to purchase a warranty to go beyond the one year provided can also choose their own warranty provider, rather than having to wait for HUD approval.
Exceptions to the New Requirements
The one-year warranty that the FHA now requires only applies if you can get a copy of the building permit and the certificate of occupancy from the issuing municipality. If you can’t, you’ll be required to obtain a two to 10-year warranty from a warranty company. The completion warranty is not optional. In order to get the loan, your builder will have to complete HUD-92544, even if you’re opting for a longer warranty.
If your loan-to-value ratio is 90 percent or less, though, none of this applies. You won’t need to submit the building permit and certificate of occupancy to FHA, but you may still want to ensure you have this information for your own protection.
Other FHA Loan Requirements
In addition to the warranty the FHA requires, you’ll find that there are other precursors to finalizing your FHA loan for new construction. Those include certifications specific to the building of your house, such as a soil termite treatment guarantee and a well and septic report. You’ll also be required to have the usual home inspections before you can finalize the sale.
All of this is generally part of the documentation you sign at closing. Your real estate agent and lender should take care of making sure everything’s in place, but it can help to be aware of what’s required. You should also make sure the builder gives you warranty documentation on all of the major appliances installed in the house in case something goes wrong.
- Federal Register: Streamlining Warranty Requirements for Federal Housing Administration (FHA) Single-Family Mortgage Insurance: Removal of the Ten-Year Protection Plan Requirements
- Michigan Mutual: FHA New Construction Requirements At-A-Glance
- NAHB Now: FHA Issues Final Rule Streamlining Home Warranty Requirements
- HousingWire: FHA Eliminates Two "Unnecessary and Outdated" Lending Roadblocks
- Better Business Bureau. "Home Warranty Inc."
Stephanie Faris has written about finance for entrepreneurs and marketing firms since 2013. She spent nearly a year as a ghostwriter for a credit card processing service and has ghostwritten about finance for numerous marketing firms and entrepreneurs. Her work has appeared on The Motley Fool, MoneyGeek, Ecommerce Insiders, GoBankingRates, and ThriveBy30.