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The Ins and Outs of FHA Financing

Dear Phyllis,
My husband and I want to help our son and daughter-in-law purchase a home. We won’t be giving them a 20% down payment, but likely close to 10%. I spoke to our bank branch manager who suggested that they obtain an FHA mortgage as they allow lower down payments. When we met with our Realtor®, he told us that most home sellers frown upon FHA financing. Why would the seller care what kind of loan the buyer obtains?  Can you offer further explanation?  
Puzzled

Dear Puzzled,
Congratulations on helping your son and daughter-in-law purchase their first home.  Prices and interest rates are low and won’t remain so forever.

Much of what appears in the media is conflicting – prices are falling, it’s a buyer’s market, or inventory is low and it’s a seller’s market. Confusing as it is, it often feels that it is both a seller’s market and a buyer’s market.

A buyer’s perspective. They listen to the news and are sometimes a bit skittish about jumping into the housing market. But if they have been looking at homes for any length of time, they have seen a lot of overpriced homes and or homes in poor condition. Well-priced homes that are move-in ready are in hot demand (especially in the lower price ranges). Frequently they sell in multiple offer situations, giving the illusion of a seller’s market.

A seller’s perspective. Their home has dramatically dropped in value.  Inventory is tight, there is likely not a lot of competition. If their home is priced according to today’s market, the seller had a lot of showings. They may have hoped for higher offers, after all there are so many buyers out there looking.

FHA loans have different underwriting criteria than conventional loans. The biggest obstacle to FHA loans is the appraisal. The appraisers are much stricter and often add conditions to the appraisal. For instance, if the appraiser notes any peeling paint it will need to be removed prior to closing.

In 20 years of selling real estate, I have never seen an appraiser make this condition for a conventional loan.

If your son is in a more competitive price range, bidding on move-in ready homes (one that will qualify for FHA financing), his having FHA financing will be a deterrent to the seller. Because the seller’s Realtor® will know of the potential pitfalls, in a multiple offer situation, his offer will be less attractive.

There is another type of FHA loan you should look into. It’s the FHA 203K.  This loan funds the buyer’s repairs and improvements after the buyer closes escrow.  It is much less common, more complex and you should only deal with a lender very experienced with this type of financing.

Phyllis Harb is a Realtor with Prudential California Realty.
She may be contacted at (818) 790-7325 or by email AskPhyllis@RealtorHarb.com.