You Can’t Buy This Home!

I have gone through this scenario many times. The buyer is qualified for a FHA loan, has found a home that they can afford, falls in love with it and then finds out they are not allowed to buy it. Why does this happen? There are many reasons. I have flat out seen communities where FHA loans are not allowed, I have also seen where some of the homes in a community allow FHA loans and the rest of the homes do not, and I have seen where communities that have lost their certification because they can’t meet FHA’s minimum requirements.

FHA loans use to have a bad reputation. They were used to get a buyer in with a small minimum down payment, minimum requirements and all kinds of options where the buyer could include things like credit card debt in their loan. Buyers did not understand how property taxes worked and builders apparently did not explain it well. The first year there were no property taxes on just-built homes. The second year property taxes kicked in and could increase the monthly mortgage payment $100 or more on average. In a year or two the loan would go bad and the home got foreclosed on.

During the 1990’s Pike Township was the fastest growing Township in Marion County. By the end of the 1990’s and the beginning years of the 2000’s builders were in high gear building high density/low cost communities. They were using FHA loans and closing the buyers any way they could. In my experience, new home salespeople that work for a production builder are some of the best salespeople I have ever seen. They are trained extensively, listen intently and know when and how to close the deal. What also helped was when they threw in appliances and upgraded carpeting, etc. for free. The way they decorated new model homes made buyers drool. It was the perfect storm for production builders.

Two things happened by 2004. Foreclosures were happening fast in these new communities. The effect was that it would drag down comparable prices in the community. I remember reading then that for each foreclosure in a community, market prices in the community would drop an average of 1 percent. In my mind and doing research, this was about right.

In 2007 I did research for a zoning commission hearing where a developer wanted to put in a new high density/low cost community next to a community that had been started in 2001 that had about 275 houses. In the years from 2001 to 2007 the existing community had a foreclosure rate of 24 percent. The average home in this community was bought new for $128,000. By 2007 the average market value of a home in this community was $82,000. That means if you bought a house in this community in 2001 and 6 years later had to sell it, you were in trouble. Using a FHA loan and paying $128,000, in 6 years you still owed $116,000. The average market value of a home in that community being $82,000 you were $34,000 upside down. So what do you do if you were the owner? In many cases the owner “walked away” from the home. There could be many reasons for this. The owner could have had a job transfer out of state, the couple divorces, one of the spouse’s dies, etc. You either “walk away” or you bring $34,000+ to the closing table when you sell it. In 2007 the short sale option was there but no mortgage company would let you use it. (A short sale is where the mortgage company allows you to sell your house for under what you owe them). The difference is forgiven. This does have an effect on your credit but not as bad as a foreclosure. The mortgage company would rather do this than have the cost of taking the house through foreclosure. It is a business decision for the mortgage company. Today short sales are very common. I also found other new communities in Pike Township that were approaching 50 percent foreclosure rates. I also know that the houses in them were bought with FHA loans.

I believe this is why FHA loans had such a bad reputation.

The second thing that happened by 2004 was sub-prime loans. There were lots of variations of these loans but basically the one that stood out was no money down and higher interest rates. This opened the flood gates for challenged home buyers. The federal government fined mortgage companies if they refused to give these loans. Once sub-prime loans were available, FHA loans almost did not exist.

I can remember an industry joke being if a buyer could fog a mirror that was held in front of them, they could get a sub-prime loan.

In my mind this was the worst thing that could have happened to the housing industry.

“Why can’t I buy this home?” asked the motivated home buyer. “Because you qualify for a FHA loan and this community is not certified for FHA loans” replies the Realtor.

As you can see, when sub-prime loans were made available, FHA loans trended down until the fall of the housing market in 2007. In 2008 sub-prime loans were no longer available. All of a sudden FHA loans took off. FHA loans financed 34 percent of the home sales in Pike Township in 2012. In 2009 it was 45 percent.

As a Realtor, I cringe when I think that I am going to lose potential sales because of a no-FHA-loan community.

The foreclosures that we have seen in the past 5 years are mostly due to sub-prime loans that were made between 2004 and 2007. The other major factors for them are job loss and the economy in general.

FHA Loan Facts
• The loan limit for a FHA loan in Marion County is $271,050. 56 percent of FHA loans in Pike Township were between $100,000 and $266,000 in 2012. That means that your main stream buyer is using the product.
• An FHA loan requires the owner of the home to live in the home. That means that an investor cannot get a FHA loan and rent out the unit.
• FHA loans today are much more restrictive than they were 10 years ago. In fact all loans are more restrictive.

My Personal Thoughts as a Realtor;

When you are dealing with buyers of homes in the under-$75,000 price point, they generally don’t have much cash on hand. The difference between 3.5 percent down (FHA) and 5 percent down (Insured conventional) could kill the deal. That could be $750 on a 50,000 Home. I know it may seem small to you and I but these people may be living from pay check to pay check. They may have excellent credit, a good job, and moving from an apartment to a mortgage may save them plenty – especially since rents are so high and mortgage interest rates are at record lows.

I have lost many sales due to the fact that the community was not approved by FHA. I think it is in the Board of Directors fiduciary duty to make sure that units can be sold any legal way that will help increase/maintain the value of the community. If you have few or no sales in a community because of no FHA sales, appraisers have to go to other like communities to get comparables. Realtors don’t like that because once you have to go outside the subject community, the variables can change dramatically.

In order to have increased value in a condo community you must have sales. It is the only true way of knowing the value of units. Without sales in a community in the past 6 months (now I am starting to see lenders, appraisers and asset managers drawing the line at 3 months) you have no true method of valuing properties. Yes you can have an appraisal done but they will look outside your community.

I guess my bottom line is that you are going to lose a lot of buyers without FHA approval.

Here are some comments about FHA loans from my good friend Todd Callen. Todd has been in this game of real estate in one facet or another since 1985. He has sold it, appraised it, and now he has been lending on it for about 9 years. Todd works for Caliber Funding and is one of the most knowledgeable loan officers I have ever met.

Take it away Todd;

Virtually all HPRs (that spells Condo in the legalese of our state) have “fallen off” HUD (FHA)’s list. Those approvals given back in the day had an expiration date on them, and we in the lending world had ways of circumventing that fall-off on given individual units by doing “spot loan” approvals on them under FHA’s guidelines up until about 18 months ago. It was at that point that HUD took away all lender’s ability to do “spot loans” under their guidelines anymore – and now to give an FHA loan to anyone in any true condo development that has fallen off HUD’s list – we would have to get that entire development back onto HUD’s list of approved condos.

On top of Tim’s perception of FHA loans and their need – I would like to add a couple of things he didn’t touch on.

1. The smallest down payment permissible in the current lending world comes with an FHA loan, and there is absolutely still a way to actually buy with no down payment to this very day. FHA itself mandates a 3.5% down payment, but our state (through an entity called Indiana Housing) has created a down payment assistance program that can allow a borrower to get what is in essence a grant for that down payment – and have no down payment of their own.

2. FHA is the most permissive of all the mortgage “granddaddies” when it comes to less-than perfect credit. One of the travesties of the world of credit scoring is that someone with a long and excellent credit payment history can see a $50.00 medical collection recently sneak onto their credit report, and have it drop what was a great credit score 120 points!!

3. I can point to a reason for the drop in the average sales price of condo units that Tim didn’t – and it is the inability of typical and qualified buyers to get financing on them… And the preponderance of first-time homebuyers (and that’s what the price point you are talking about here lends itself to) need FHA loans because of a lack of depth in their credit profile, the need for the ability to receive a gift from a family member for down payment (if they don’t go with Indiana Housing), and the need for the world of lending to let them in with small dollars even without great credit.

In addition, conforming to the rigors of FHA’s mandates actually pay dividends to Condo developments when buyers pursue Conventional (non-FHA) small down payment loans in them. How many condo volunteer boards have heard (through their hired management companies or unit owners attempting to sell) that “those mortgage company’s questionnaires are killing us!” Those questionnaires actually originate from the predominant Non-FHA “granddaddies” in the world of mortgage. Their names are Fannie Mae and Freddie Mac. Those questionnaires ask about a development’s percentage of tenant occupancy, whether a development has 10% of its annual budget in a reserves account, whether any single entity owns more than 10% of the units, etc., etc.. And the “wrong” answer(s) on these questionnaires can absolutely Kill a deal on a condo unit that has no appraisal challenge and whose buyer/borrower has no “issues” relative to credit, income, debt load, or anything else.

Please understand that no matter whether Chase, PNC, Fifth Third, Stonegate Mortgage, or Caliber Funding writes a mortgage loan – we DON’T own that loan – or in reality set the base guidelines for getting it. You may very well pay us every month, but the Owner of that note ultimately is one of the “Granddaddies” – and they make the rules for the writing of it. Conform to their rules (as either a borrower or a Condo development) and we can give you their money. Don’t – and we can’t. And it is their money all us consumers pursue – because it is that money that has a very low fixed interest rate, a long fixed term, and is given with a low (or no) down payment.

Thanks for your thoughts Todd.

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