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Best to buy before new FHA guidelines take effect Starting in early summer, the Federal Housing Administration is tightening lending standards in an effort to bolster its dwindling reserves. The new lending standards will make it tougher for some prospective buyers to purchase a home by requiring a higher down payment than the typical 3.5 percent for some borrowers, higher insurance premiums and reduced seller concessions. Securing FHA-insured mortgages is attractive to borrowers because down payments are only 3.5 percent. Most conventional loans now require 20 percent down, keeping many creditworthy borrowers on the sidelines. New Guidelines The new rules which are temporary and take effect this summer come after more than a year of stringent standards from lenders. Among them:

Better Credit Scores New borrowers will have to have a minimum credit score of 580 to qualify for a 3.5 percent down payment. Previously, there was no minimum score. Those with lower scores will have to make at least a 10 percent down payment. The average credit score of FHA-insured borrowers is 693.

Higher Insurance Premiums Buyers who get an FHA-insured loan will soon have to pay a higher initial insurance premium. The new premium will be 2.25 percent of the value of the total loan amount, up from 1.75 percent now. A $100,000 mortgage would require a payment of $2,250, or $500 more. But buyers can roll the added cost into the loan amount.

Reduction in Seller Concessions Starting this summer, sellers will not be able to offer as much help to buyers to pay their closing costs. The maximum amount of assistance will drop to 3 percent of the value of the property, from the current 6 percent.

Another FHA rule change could help foreclosure-plagued markets like Las Vegas, Phoenix, Miami, Detroit and Los Angeles, making it easier for investors to flip houses to buyers who use FHA-insured loans. Effective Feb. 1, the federal government will waive for one year an FHA anti-flipping rule that prohibits insuring a mortgage on a home owned by the seller for less than 90 days. The new rule lets investors buy today and re-sell as quickly as possible. The move is to allow REO homes purchased by investors to resell as quickly as possible, helping stabilize real estate prices and revitalize neighborhoods after the U.S. housing market collapse. This new rule will open up a new pool of homes to buyers. Waiving the 90-day flip rule is being heralded by many real estate investors as a boon to their ability to buy, rehab and resell foreclosed homes on a more efficient time line. Real-Estate Sector Cheers Tax Credit

A proposed tax credit for home purchases is raising the hopes of the real-estate industry, which believes the credit could be just the stimulus needed to stabilize the housing market and get hesitant buyers to take the plunge.

A provision included in the Senate version of the stimulus bill would provide a tax credit for 10% of the purchase price of a home, up to a maximum $15,000. The provision faces an uncertain future even if the stimulus passes in a Senate vote set for Tuesday. The measure would have to win backing from the House, which last week voted to repeal a provision that requires an existing $7,500 tax credit to be repaid over 15 years. That credit, which has income limits, applies only to first-time home buyers, who last year accounted for about 40% of all buyers, according to the National Association of Realtors.

Economists say the credit could help buyers get over worries about the housing market.
The idea behind the broader Senate plan is to lure fence-sitting potential home buyers like John Westerdale, a 47-year-old information-technology worker who has been shopping for a home for a year but has been reluctant to finalize a deal because of falling home prices. Sunday, he planned to visit a four-bedroom home listed at more than $500,000 in Ringwood, N.J., and said that if the credit is included in the final package, he'll speed up his plans to make his first home purchase. The tax break, he says, could help offset the possibility of further declines in home values. "The problem is, if you buy a house you'll have lost value in two months," he says.

Economists say the credit could help buyers get over that worry. "This is triage," says Mark Zandi, chief economist of Moody's Economy.com. "We're in a runaway elevator trying to put on the brakes...and this can help change the psychology in the marketplace."
The National Association of Home Builders and the National Association of Realtors began aggressively promoting the tax credit last fall as part of a lobbying effort, which received a big boost when it was embraced by leading Senate Republicans last week. Congress last year approved the $7,500 credit for first-time buyers that had to be paid back over 15 years. But consumers weren't excited about the plan, and housing executives say it didn't spark many sales.

The current proposal has strong support from consumers. At real-estate firm Long & Foster Cos. in Chantilly, Va., Web-site traffic has increased fourfold over the past month and managers report a big uptick in interest from clients who want to go under contract if the tax credit is approved, says company president David Stevens. He sees the tax credit boosting sales among first-time and "move-up" buyers who have been sitting on the sidelines for years and could benefit from low home prices and interest rates.

A look at the differences between the House and the Senate tax credit provisions for home buyers.

The tax credit is refundable, which means that even buyers who don't owe any federal income tax will receive a check. Modifies an existing tax credit to eliminate repayment provisions.

The tax credit is nonrefundable, which means that buyers can only claim the credit if they owe income taxes. Buyers can claim the credit on two years of tax returns.

Limited to singles who make $75,000 or less, and married couples who make $150,000 or less.

Source: Joint Committee on Taxation
"Now is not the time to buy for everybody, but if you're sitting on the sidelines expecting to wait longer to buy that perfect home...you have a layering of opportunity" if the tax credit passes, he says. Some economists say that without any effort to stimulate demand from buyers and eliminate a supply backlog, prices will continue to fall, triggering more defaults as more homeowners lose equity. That creates a self-reinforcing process, whereby banks that hold mortgage-related securities take more losses and tighten credit, slowing the economy.

Even some landlords, who could see their tenants leave to buy homes, support the approach to boost demand. "You need to get the housing market back on its feet because it's dragging us all down," says Richard Campo, chief executive of Camden Property Trust, a Houston-based apartment owner.
But the measure has its share of critics who say Washington shouldn't be spending billions that largely benefit homeowners with equity in their homes, and upper-middle-income borrowers who have stable incomes and good credit. "The biggest beneficiary of this is whoever owns a home today at a price where they're unwilling to sell," says Thomas Lawler, an independent housing economist in Leesburg, Va. He and others say the real focus should be on stemming foreclosures, which are flooding the marketplace with price-destroying competition.

And because the Senate tax credit is nonrefundable, it wouldn't benefit buyers who don't owe any income tax or who have a low tax liability. About 38% of Americans owe nothing on their federal income taxes. "It's basically a giveaway -- an unnecessary windfall -- to higher-income people," says Sheila Crowley, president of the National Low-Income Housing Coalition.

Mounting job losses, rising credit-card defaults and tighter lending standards also could counter efforts to jump-start home sales. Jeff Jacobs says he is prepared to speed up his plans to move out of his Westerville, Ohio, condominium and into a larger home with his wife and 7-month-old daughter. But the 28-year-old urban planner isn't sure he would be able to qualify for a loan after losing his job late last year, and he wonders if he could sell his three-bedroom condo. "If the credit comes along, maybe we could get some buyers in here," he says.

Correction & Amplification
The credit in the Senate provision is nonrefundable, which means that buyers can only claim the credit if they owe income taxes. A graphic in an earlier version of this article said the Senate credit was refundable.
Printed in The Wall Street Journal, page A4