by Brian Flock
The US government stimulus programs were in part designed to increase home ownership and to decrease home foreclosures. In support of this, Federal Housing Association (FHA) loan limits have nearly doubled to nearly $700,000 in San Diego County (see graphic) and yet still require less than a 5% down payment. Lending requirements have required a modest FICO score and two years of verifiable employment.
So why are so many would-be-home-buyers in San Diego expressing frustration over their offers being ignored when they are based on FHA loan contingencies?
With foreclosure (aka REOs) and short sale properties being the majority of housing inventory, the answer comes down to the unique health and safety requirements of FHA loans, plus the myriad of documentation requirements.
According to the FHAs own website that documents the program, an FHA loan requires the “timely cooperation of up to 53 different parties.” Any misstep by any one of those parties can easily result in a day to four weeks of delay in the closing. Lenders in control of REOs and short sales often don’t view those extra hurdles as worth the risk when they know that they are already going to lose a lot of money on the sale.
However, on July 9, 2009 the Mortgage Bankers Association said that FHA loans had risen to a full 35.9% of all loan applications, an increase of nearly 530% since August 2005 at the height of the real estate boom. There is clearly demand for these loans and the market will need to find a way to accommodate them, especially with an expected wave of short sales and REOs to hit the market this fall.
What can FHA buyers do to improve the chances for an FHA offer despite t he hurdles for sellers of distressed properties?
Here are some tips:
1. Get pre-approved for an FHA loan from a ”top-tier” bank. Listing agents and sellers (such as banks) of distressed properties will usually ignore “pre-qualification” letters and even pre-approval commitments from second tier banks.
3. Be sure to do a good comparison of recent sales within the past 6 to 12 months within a one mile radius of the home of interest before making an offer. The offer will need to be in the ballpark of these homes since FHA appraisals will likely use the same homes in their appraisal.
4. Target properties that have already fallen out of escrow. The sellers will be more motivated to get such homes moving.
5. Make the offer based on a realistic closing timeframe of 45 days, not the historical standard of 30 days. Although this may seem to make your offer less attractive at face value, it shows the seller that you understand the realities of delay in the current financing market.
6. For condos, have your real estate agent make sure that the condo building in question is already FHA approved.