FHA Loans are Tricky
Buyers who are in search of a home and have 5% or less to put down toward the purchase of their home may choose to use and Federal Housing Administration loan so that they can keep more of their cash. Additionally, private mortgage insurance costs less under FHA.
If you are a buyer who wants to purchase a house and you want to get an FHA loan, please be aware that many foreclosed home sellers (lenders) are unwilling to look at offers that are FHA approved. The reason is that FHA lenders are much pickier than conventional lenders and ding the home if it has maintenance issues that would be considered minor for conventional lenders, such as a cracked window or a broken interior door. Moreover, all contracts written for REO’s or short sales must be as-is as required by the seller. FHA may require an item to be repaired which is not allowed by the REO seller. FHA also may require more paperwork to be completed and may do additional inspections beyond the appraisal which can stall or cancel the deal.
This experience is happening in particular in East Contra Costa County where prices have fallen and multiple offers are standard. If a seller gets two offers and the net price is the same but one buyer is offering 5% down and the other buyer is offering an FHA loan, the seller will choose the conventional offer. This situation will happen even if the FHA offer is higher.
The key is to try to qualify the buyer with a conventional loan first, such as a 5% down loan. Then if you get the purchase contract and after the appraisal has been completed, request through an addendum to switch to an FHA loan with no added time. Your loan agent should have qualified FHA lenders that can close short of 30 days. Since the appraisal will have already been completed, you will know if the property will be able to qualify for an FHA loan.
Potential Buyer on 28 Apr 2009 at 11:27 am #
This article: FHA Loans are tricky is a very interesting subject. If it is a known fact that sellers disqualify buyers with FHA Loans, isn’t this considered prejudism? Is this not against Real Estate Code of Ethic?
Now, if a person were to follow your suggestion which I think is helpful…would the buyer not have any financial obligations to deliver what they initially offered the sellers (i.e. the 20% down payment)?
Is there any possible challenges with this?
Tief on 28 Apr 2009 at 1:07 pm #
Thank you for commenting. The reason that disqualifying buyers with FHA loans is not against the code of ethics is because the guidelines for the loans themselves is set by Fannie Mae and Freddie Mac. Therefore, the bank is simply following government set parameters. There is a long list of acceptable and unacceptable conditions for FHA loans. For example, there are several investors who are doing flips here in West Contra Costa County. The investors cannot take FHA buyers until they have owned the home for a minimum of 6 months. There are many homes here in West Contra Costa County whose condition will preclude an FHA loan. Condominiums whose HOA’s are bankrupt also cannot be financed. Additionally, there is really nothing other than straight discrimination that precludes a seller of a home from choosing any offer they want in a situation where multiple offers are received. So if there are two blind offers, and one is for $100,000 cash and another one for $110,000 requiring financing, the bank will go with the cash offer without a second thought in most cases. The closing time is shorter and no appraisal is required.
If you are making offers with FHA financing, I would suggest that you strategize with your realtor about how to structure the offer to make it more attractive on the front end and then make a change during the loan contingency process. In most cases, the seller will not pull the contract once they have a ratified contract, unless the buyer is not fulfilling their timeframes. Even the cancellation of the contract buy the seller requires a 24 hour notice to perform first.
Potential Buyer on 21 May 2009 at 9:27 pm #
Hi there ~ I have more questions for you:
When the house gets appraised then a buyer switches to FHA, would another appraisal be required for FHA since the two loans have different requirements?
What are the chances that a seller would decline the contingency to switch from conventional to FHA? If the seller declines, would the buyer be able to back out of the transaction but not lose their earnest deposit?
How soon should the appraisal be completed and how soon should the contingency be submitted to the seller so that the buyer isn’t risking the earnest deposit?
Tief on 31 May 2009 at 8:52 pm #
If you start out with a conventional loan appraisal then you will have to redo the appraisal. I would recommend a more direct approach. Do not start with the conventional loan, but rather start with the FHA loan process as long as the realtor and the lender have talked extensively about the condition of the home. If the lender believes that the condition of the home will pass an FHA appraisal then start with that loan.
At the point that the appraisal is completed and signed off, then contact the seller if required, and change the financing terms. It is highly unlikely that at that point the seller would back out of the transaction since the appraisal is the biggest impediment to FHA financing and the home has passed.
An appraisal can be completed in approximately 7-10 days. The contingency period is negotiable at the time of the offering of the purchase contract.