In 2019, the Department of Housing and Urban Development (HUD) issued sweeping changes to warranty requirements for FHA, VA, and USDA loans. Over five years later, the regulatory changes still have many builders and lenders asking, “Are we compliant with the requirements?”

PWSC is here to break down all the details. Our team of experts compiled need-to-knows on the updated requirements, warranty compliance options, and additional factors to consider for your business and buyers.

Background on the HUD Warranty Rule Changes

In February 2013, HUD published a proposed rule to eliminate the requirement for a 10-year warranty to qualify for FHA mortgage insurance. HUD believed that significant improvements in building technology, quality of housing, and adoption and enforcement of uniform building codes mitigated the need for additional protection safeguarding property owners from workmanship and material defects.

In its place, HUD sought to retain the Warranty of Completion of Construction requirement as a condition for FHA mortgage insurance. This type of warranty between builder and buyer ensures that a new construction home was built according to plan and is free from defects in equipment, material, or workmanship. The warrantor agrees to fix, pay for the defect, and restore any component of a damaged home as part of the terms and conditions of the warranty for one year from the date the title is conveyed to the buyer.

After years of analyzing homeowner data, addressing public comments, and assessing the financial impact of the reduced requirements, the new rule took effect March 14, 2019.

Similar changes followed for VA and USDA loans. The updates made a 10-year insured warranty an option, rather than a requirement, for meeting mortgage protection conditions.

FHA Loan Requirements

Summary of Changes: The Mortgagee Letter issued in May 2019 eliminates the 10-year protection plan requirement for site-built housing (one to four units), condominium units, and manufactured housing with case numbers assigned since January 4, 2021.

Updated Documentation Requirements for FHA Financing:

• Form HUD-92541 – Builder’s Certification of Plans, Specifications, and Site
• Form HUD-92544 – Warranty of Completion of Construction
• Required inspections as applicable
• Additional reports, certifications, and analyses as specified on page 474 of the HUD Handbook 4000.1

Warranty Period: One year starting on the earliest date from 1) when the title is conveyed to the buyer, 2) construction is complete, or 3) occupancy begins.

VA Loan Requirements

Summary of Changes: Effective as of March 2019, the VA no longer requires that builders issue a 10-year insured warranty for a VA-backed mortgage if they sign a Warranty of Completion of Construction. An insured warranty is an option for guaranteeing structural integrity rather than a requirement for the loan.

Updated Documentation Requirements for VA Financing:

• VA Form 26-1859 – Warranty of Completion of Construction

– OR –

• A 10-year, insurance backed warranty

– AND – (for both options above)

• Evidence of Construction Completion as outlined in chapter 15 of VA Pamphlet 26-7

USDA Loan Requirements

Summary of Changes: New requirements outlined in HB-1-3555 SFH Guaranteed Loan Program Technical Handbook and updated in November 2022 transition from a 10-year insured warranty mandate for fulfilling USDA lender guidelines to becoming one of three options for complying with the revised rule. 

Updated Documentation Requirements for USDA Financing:

• Certificate of Occupancy – issued by a local jurisdiction showing that it has performed at least three construction phase inspections, including inspections noted in option two, and a one-year builder warranty plan acceptable to Rural Development

– OR –

• Three construction inspections – performed when:
  • Footings and foundation are ready to be poured and prior to back-filling;
  • Shell is complete, but plumbing, electrical and mechanical work is still exposed (not applicable to new manufactured homes);
  • Final inspection of completed work prior to occupancy; and
  • A one-year builder warranty plan acceptable to Rural Development. Builders may utilize their own warranty form, HUD-92544 – Warranty of Completion of Construction, or Form RD 1924-19 – Builder’s Warranty.

– OR –

• Final inspection and a 10-year insured builder warranty

Is a 10-Year Warranty Still Valuable?

This is probably the question running through your mind when new requirements say a one-year warranty may suffice. The short answer is “yes” and here’s why:

1. Ten-year insured warranties make an excellent sales tool, especially in a depressed housing market. When buyers have multiple home options, accessing a longer warranty provides invaluable peace of mind to help make the sale and keep homeowners satisfied long after handing over the keys.
2. Most states have statutes of repose that last for eight or 10 years which still hold builders responsible for structural defects and habitability claims.
3. Resolving defect disputes with homeowners without a neutral third-party and defined dispute resolution process can take years and cost thousands of dollars. A 10-year warranty should come with a claims resolution process that expedites fixes, while being fair to both sides, without taking issues to court.
4. Insurance-backed warranties provide a financial safety net for builders by transferring the liability. A defect in one home can quickly pop up across an entire neighborhood and for the materials used in every build. The warranty provides compensation to keep builders from footing the bill on big repairs.

Ask PWSC

Have other questions about the unique coverage needs of home builders and how to meet loan requirements? Reach out to PWSC. Our warranties protect more than 1.9 million homes and many of the nation’s largest builders. We provide protections and services that keep builders compliant and their homeowners happy. Learn more at www.pwsc.com.