Myth-busting FHA Loans- A Success Story

With the tightening of loan qualifications with most lenders, the 100% financing of yesteryear is all but gone. However, there is a way with FHA. In fact, I had some clients close last week who bought a home with nothing to pay except a little earnest money.

FHA loans are quite mystifying until you worked with them a couple times. I’m not mortgage guy, but let me explain the basics from my experience, both on the buying and selling side of them. First, a couple myths to bust:

MYTH 1- FHA will require lots of repairs
Years ago this may be a concern, but the revisions made in January 2006 loosened many of the guidelines, requiring fewer items to be repaired. The inspection for these repairs is done by an FHA approved appraiser as part of the appraisal.

MYTH 2- Sellers will have extra hidden costs to pay
As with any contract, everything is negotiable. It is very common that the sellers will assist with the buyer’s closing costs or possibly contribute to a charity like Ameridream to give the buyers some down payment assistance, but this is all negotiated upfront. Before we have a binding contract, the seller will know their net proceeds from the sale without fear of surprise costs due to the FHA financing.

MYTH 3- Financing for FHA buyers is more likely to fall through
I doubt it’s any more likely than with any other financing. I’m not sure about the exact stats, but the strength of a buyer’s pre-approval is always suspect until the lender has actually collected the required paperwork to make sure that they qualify and that no surprises lurk beneath the surface. It’s always good to work closely with the lenders to make sure that the buyers really are qualified, but sellers who are worried about this should probably just be thankful to have a buyer, right? :)

To achieve a 100% loan through FHA, the seller or possibly a family member contributes to a charity such as Ameridream who will, in turn, contribute toward the buyer’s downpayment. Sellers are often uncomfortable with this at first, but I always try to explain it upfront so that they understand how it works. The funds are built into the sales price and negotiated upfront. It’s completely legal, but still a little complicated. I wrote more about these programs in this article from Jan. 2007.

Back to real life… My clients last week bought a historic home built in 1932. It hadn’t been renovated, but has been in the same family since the ‘60’s. It wasn’t in major disrepair, but still had some old knob & tube wiring, and all the plaster walls intact. Very low funk factor. The only FHA repair we had to do was to replace a portion of the roof that had an obvious leak that had come through the drywall in a back addition on the house. This was no problem, since the buyers were going to fix that anyway. (It helped that their Realtor [me] occasionally does some roofing and drywall, eh?)

The lending bank was a slow mover that I’ll avoid in the future, but otherwise, the process went smoothly. In the end, the buyers were thrilled and excited to finally own a home of their own. They’ve already started ripping up carpet to reveal some well-preserved hardwood floors.

After a few successful closings involving FHA financing, I’m a fan. They do require some extra work and sometimes a lot of patience, but a qualified buyer can still own a home without a down payment.

Just make sure you work with a great lender and Realtor who can get it done for you. Thinking about it? Give me a call.

-Peter
www.NashvilleCityHomes.com