HUD Removes Ten-Year Protection Plan Requirement for Certain High-LTV Loans

On December 3, 2018, HUD announced a final rule that will remove the regulations requiring borrowers to purchase 10-year protection plans to qualify for high loan-to-value (high LTV) mortgages where the dwelling was not approved for guaranty, insurance, or a direct loan before the beginning of construction and where the dwelling is less than one year old.  The final rule comes after HUD published a proposed rule on February 6, 2013, and received and considered comments on that proposed rule.

HUD believes the significant improvements in building technology and the quality of housing, the adoption of uniform building codes, and the local jurisdiction enforcement has made the 10-year protection plan requirement no longer necessary to safeguard FHA’s insurance fund.  It is also believed that the removal of the requirement will benefit homeowners who choose to purchase a protection plan; because FHA approved warranty issues will now have to compete with other warranty issuers, there will likely be additional market competition.

The final rule notes that HUD is retaining the Warranty of Completion of Construction requirement for the builder and the buyer of a new construction home to obtain FHA mortgage insurance.  This warranty is meant to protect the buyer against defects in equipment, material, or workmanship supplied or performed by the builder, subcontractor, or supplier by requiring that the warrantor agree to fix and pay for the defect and restore any component of the home damaged in fulfilling the terms and conditions of the warranty.

The final rule will be effective March 14, 2019.

The full text of the final rule may be found here.