Many sellers feel FHA mortgages are too restrictive on the seller, costs the seller too much money, requires the property to be perfect, has a million forms to sign, and take too long to close. Many sellers will not accept offers with FHA financing. Most Realtors have horror stories about how long an FHA loan took to close or how much the sellers had to pay for unnecessary repairs to the property.
Many of the negative idea about FHA were not warranted, though many were.
But, in 2005 and 2006 HUD has made many changes to the FHA program that reflects a more “user-friendly” approach to appraisals, forms and costs. By accepting homes that are less than perfect, lower down payments, and weaker credit histories FHA loans are more attractive than ever to buyers, sellers, and Realtors.
No Longer Required:
- Automatic Termite Reports – these are no only required when there is evidence of previous wood-destroying insect damage, and evidence of un-repaired structural damage.
- Repair of peeling paint in homes built after 1978
- Repair of broken windows or damaged exit doors
- Roof certification of flat roofs
- Separate well and septic inspections on existing homes
- Handrails for steps and stairs
- Repair of minor cosmetic issues such as cracked plaster/drywall, soiled carpeting, minor plumbing leaks, crawlspaces with debris or trash, etc.
- 10 year builder warranty if a property is 90-100% complete at time of appraisal with a building permit and certificate of occupancy
Now accepted:
- “As-is” appraisals; no more cumbersome evaluation condition sheets!
- Minor property deficiencies, usually a result of normal wear and tear, that don’t affect the safety of occupants or security of the property.
- Down payment assistance (DPA) from the seller, in the form of a contribution to a non-profit organization that is gifted to the buyer; the DPA is allowed in addition to the 6% seller concessions for closing costs, prepayments or discount points.
- Fee structure similar to conventional loans; the only non-allowable FHA closing cost is the tax service fee.
- 95% cash out refinance.
- Maximum financing for non-arm’s length transactions under certain conditions.
- Conventional HUD forms for FHA loans, versus those formerly required.
- Buyers in a Chapter 13 Bankruptcy or consumer credit counseling program are eligible with a satisfactory 12 month payment history, versus complete payment of all accounts.
- Collections up to $3,000 may remain open – over $3,000 considered on a case by case basis.
- Buyers with a Chapter 7 Bankruptcy are eligible 24 months after discharge.
- 15% vacancy factor (vs. 25% on conventional loans) for cash flow analysis on 2-4 unit properties.
Last year, the Expanding American Homeownership Act was introduced in the Senate which would make FHA mortgages a more attractive option in today’s market. Some of the proposed changes are:
- Eliminate the statutory 3% minimum investment for borrowers. Many first-time home buyers are now getting mortgages will no money down. FHA would offer various down payment options.
- Increase and simplify the FHA loan limits. In many parts of the country home prices have risen to the point that FHA financing is not an option. By raising the loan limits to become closer to conventional loan limits more borrowers will have the option of using FHA for their home financing.
- Create a risk-based mortgage insurance premium that would be determined by the borrower’s credit risk. FHA is already less restrictive on credit histories than conventional loans, but this would open the program to borrowers who now only have the option of sub-prime lending prorgrams.
FHA has always been a great program to help people afford the American Dream. With the crisis facing the sub-prime mortgage market, FHA is again becoming a more popular financing option and, with the changes already made as well as the upcoming changes, will become more popular in the future.
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