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Selling agents still frequently tell me that they have difficulty getting listing agents to accept their FHA offers.
This is no doubt b/c of the many myths associated with FHA financing.
As a result, I am addressing some of the pros and cons of FHA financing again today.
- “As Is” Condition OK: It is a huge myth that FHA financed properties need to be in better condition than conventionally financed properties. The condition requirements are largely the same for FHA and conventional. FHA does NOT require a clear Section I Termite Report. FHA appraisers are more likely to call out peeling paint, but that is about the only difference – and that is only an issue with older homes.
- Large Lender Credits to Make Deals Work: FHA rates are low and the “yield premiums” or “rebates” that lenders receive are large. B/c of this, lenders are more easily able to offer large lender credits to cover closing costs, freeing up even more cash to cover down payment requirements and/or appraisal shortfalls – if necessary.
- Speed: We can close FHA transactions in 14 days. It is a myth that they take longer to close.
- More Flexible Underwriting: B/c FHA is more flexible, listing agents can be more certain of closing in most cases when buyers are even moderately strong.
- Low Rates: FHA rates are lower than conforming loan rates, making it easier for borrowers to qualify. Many lenders unfortunately capitalize on the myth that the FHA rates are higher, convincing borrowers as much and charging much higher rates as a result.
- Low Down Payment/Gifts/Appraisal Shortfalls: FHA only requires 3.5% of the purchase price for a down payment, and all of it can be a “gift” from a relative. This too makes it easier for buyers to qualify. In addition, we sometimes move borrowers from conforming to FHA financing if we think an appraisal will come in low b/c FHA’s low down payment requirement frees up more cash to cover appraisal shortfalls.
- We Call Listing Agents: One of the keys to getting listing agents to accept FHA financed offers is a phone call from the lender to explain why FHA financing is better. We love calling listing agents b/c it gives us the opportunity to tout the strength of our FHA offers and to let them know we can close in 14 days. This may be one of the most important points of this blog.
CONS: WHEN LISTING AGENTS SHOULD BE LEERY
Despite all the benefits of FHA financing there are few instances when listing agents should be leery of FHA financed offers:
- Cash Tight/Appraisal Shortfall Likely: If a borrower is particularly tight on cash – with no access to additional gift-funds – and an appraisal shortfall appears likely, listing agents should be leery of FHA financing.
- Peeling Paint/Older Homes: The one condition issue that appraisers tend to call out more for FHA financed transactions is peeling exterior paint. This of course is not a deal killer, as we have had handymen repaint exteriors prior to close numerous times, but it is something to be aware of.
- Not Fully Pre-Approved: For strong borrowers, this is not usually an issue b/c FHA is so flexible. But for weaker borrowers with credit scores under 640 or with very little cash, this should be a major concern.
Founder/Broker | JVM Lending
(855) 855-4491 | DRE# 1197176, NMLS# 310167