Cancellation of 10-Year Warranty Requirement on FHA Loans

In March 2019, officials from the Department of Housing and Urban Development (HUD) and the Federal Housing Administration (FHA) announced some changes to the home warranty requirements on FHA loans.

At a glance: This change, announced in Mortgagee Letter 2019-05, eliminates the 10-year protection plan requirements on some FHA loans. It cancels the requirement that home buyers / borrowers purchase a 10-year protection plan for new construction homes.

This change could reduce costs for some borrowers. The full details (adapted from the aforementioned Mortgagee Letter) are outlined below.

Changes to Ten-Year Warranty Requirement on FHA Loans

On March 12, 2019, HUD officials published Mortgagee Letter 2019-05. (For those who aren’t familiar, these letters are used to announce official changes to the FHA loan program. They are typically distributed to all mortgage lenders that participate in the program, and posted onto the HUD website.)

Mortgagee Letter 2019-05 announced some important changes relating to warranty requirements on FHA purchase loans. According to agency officials, these changes are intended to “streamline the warranty requirements for FHA single-family mortgage insurance.” They could also be a money-saver.

Here is a section-by-section breakdown of that policy letter:

Purpose and Effective Date

Mortgagee Letter (ML) 2019-05 eliminates the 10-year protection plan requirements mentioned above, thereby “allowing borrowers to qualify for FHA mortgage insurance on high loan-to- value 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.”

So this change primarily applies to newly built homes, defined here as being less than one year old.

Effective date: This change to the 10-year warranty requirement applies to all FHA loans (forward mortgages) with case numbers assigned on or after March 14, 2019.

Policy updates will be incorporated into a forthcoming update of the HUD Single Family Housing Policy Handbook 4000.1 (Handbook 4000.1). See the “Handbook” section below for more on this.

FHA Programs That Are Affected

The warranty requirement changes outlined in ML 2019-05 specifically apply to the “origination of all FHA Title II forward mortgage programs.” In this context, Title II forward mortgages are the loans used by home buyers to purchase a property.

The Federal Housing Administration also has a reverse mortgage program, which goes by the official name Home Equity Conversion Mortgage (HECM). But that program is not affected by the change to the warranty protection plan.

Summary of Changes to Warranty Requirements

According to FHA and HUD officials, this policy change is being made to streamline the “home warranty requirements for FHA single-family mortgage insurance by removing the policy guidance that require borrowers to purchase 10-year protection plans in order to qualify for certain mortgages on newly constructed single-family homes.”

Under the new requirements, the home buyer will still retain a one-year warranty. This warranty gives the FHA assurance that the property was constructed according to plan. It also gives the buyers some degree of protection against “defects in equipment, material, or workmanship supplied or performed by the builder, subcontractor, or supplier.”

Other key requirements under this change:

  • The warrantor (i.e., the person or company providing the warranty), shall agree to fix and pay for the defect.
  • The warrantor also agrees to restore “any component of the home damaged in fulfilling the terms and conditions of the warranty.”
  • The one-year warranty on such homes shall commence on the date when the title gets conveyed to the buyer, the date that construction is complete, or upon occupancy — whichever occurs first.

Background: Why They Are Making This Change

Prior to this change, FHA guidelines said that properties under construction or existing for less than one year were “ineligible for a mortgage with greater than a 90 percent LTV ratio unless they meet pre-approval requirements or are covered with a HUD-accepted insured ten-year protection plan.” The agency is now eliminating that requirement.

Though it takes effect in 2019, this change actually started last year.

In December of 2018, HUD officials released a “Final Rule” for streamlining the home warranty requirements for the FHA single-family mortgage insurance program. As part of that decision, they eliminated the “Insured Ten-Year Protection Plan” requirements that previously applied to some FHA purchase loans.

Federal Housing Administration officials said that they’ll be keeping the “requirement that the Warranty of Completion of Construction be executed by the builder and the buyer of a new construction home” as a requirement for FHA mortgage insurance.

ML 2019-5 also explained the primary reason for this change:

FHA officials have determined that the property inspection requirements and the Warranty of Completion of Construction “achieve the intent of providing assurance of quality more effectively than the ten-year protection plan.” Relying on those requirements would also eliminate the extra costs associated with the ten-year protection plan.

So, in addition to simplifying procedures, the change to home warranty requirements on FHA purchase loans is also intended to reduce overall costs.

Updates to the FHA Handbook

The guidelines and requirements for the ten-year warranty will be removed from the following subsections of the HUD Single Family Housing Policy Handbook 4000.1:

  • Section II. A. 8. i. ii. (A) Site Built Housing and Condominiums (By Construction Status at Time of Appraisal)
    • (1) Proposed Construction
    • (2) Under-Construction
    • (3) Existing for Less than One Year (100 Percent Complete)
  • Section II. A. 8. i. ii. (B) Manufactured Housing (By Construction Status at Time of Appraisal) Inspection Requirements for Maximum Financing
    • (1) Proposed Construction
    • (2) Under-Construction
    • (3) Existing for Less than One Year (100 Percent Complete)
  • Section II. A. 8. i. iii. Required Documentation for Maximum Financing
  • Section II. A. 8. i. iv. Financing LTV Limit

Getting Answers to Your Questions

Mortgage lenders and other program participants who have questions about the cancellation of the FHA loan 10-year warranty protection plan can visit (This is a searchable database of frequently asked questions relating to the FHA mortgage insurance program.)

Program participants can also call the Federal Housing Administration’s Resource Center at 1-800-CALL-FHA (1-800-225-5342). Individuals with hearing or speech impairments may reach this number via TTY by calling the Federal Relay Service at 1-800-877-8339.

Disclaimers: This article draws from information provided within HUD Mortgagee Letter 2019-05, and includes our own interpretation and commentary. While we make every effort to ensure the accuracy of our content, we are not the official source for FHA guidelines and requirements. To learn more about these changes for warranty protection, refer to the HUD letter mentioned above or visit their resource center.