Is your buyer using a FHA mortgage loan?
FHA loans are very common. They are also feared by sellers. Because they are common and concerning to homeowners, I thought a blog article on this would be helpful.
Chances are your buyer will use this type of mortgage if your home sells for less than $500,000. The median sales price is $485,000 in Bergen County. This means half of the homes sold so far this year are above and half are under $485,000. As a result, half of all home sales have a good chance of using a FHA mortgage.
So the answer is “very likely”. There are 2 issues with FHA mortgages: The buyer’s credentials and the FHA appraisal.
The Buyer’s Credentials
FHA mortgages have higher fees than those of a conventional loan. The mortgage insurance fee stays with the loan it’s entire life. Why would anyone use a loan that costs more? Why would anyone use a loan that charges you mortgage insurance even when you no longer need it?
Because FHA loans allow a lower credit score, smaller down payment and a wider debt to income ratio. FHA borrowers need the kinder terms of these loans to get a mortgage. The don’t qualify for a conventional loan.
Should this be a worry for a seller? Frankly, I don’t believe it matters. Why? Because your buyer does qualify to get a mortgage. If your buyer has the credentials to qualify for a loan, then you have crossed the primary hurdle.
The FHA Appraisal
Not all appraisers can do FHA loan appraisals. An appraiser must be a licensed HUD approved appraiser to do a FHA mortgage loan appraisal. FHA appraisals are different. A conventional loan appraiser determines what the house is worth. A FHA appraiser determines what the house is worth and inspects the home’s condition.
It is the home inspection aspect that frightens sellers. This is because any condition items that the FHA appraiser finds to be a problem must be corrected or the loan won’t be funded. You can’t close if the mortgage doesn’t happen.
Your house must meet the FHA guidelines for acceptable condition. As a result, homes in poor condition are not candidates for FHA buyers. Let me give you an example.
Real estate agents complain about FHA appraisers and peeling paint. They howl all the time about it. If you understand why then it makes sense.
An FHA appraiser comes to a house built in the 1960’s. He sees a wall with peeling paint. His appraisal report requires that the wall is painted before the loan is funded. The seller has to get the wall painted so his buyer can get the FHA loan to buy the house.
The reason for this is simple – lead paint. The Federal Government stipulates that any house built on or before 1978 might have lead paint present. So peeling paint in a 1960’s house is a hazard. Makes sense, doesn’t it?
Safety issues are another concern. An example is a loose hand rail or broken pavement that’s a tripping hazard. The bottom line is that the house has to be safe and in good condition.
The Bottom Line for Sellers
The bottom line for homeowners who are selling their home is that FHA loans are used by buyers who need more liberal qualifying terms. This does not mean that the buyer will not get a mortgage. Far from it. It means that you have a buyer who is able to get a mortgage with a smaller down payment (as low as 3.5%), lower credit score and a bit more debt. For sellers with homes in average or better condition, there is not need to fear the FHA appraisal.
A FHA mortgage loan keeps more buyers in the game. More buyers is always good for sellers because this increases their opportunity for a sale. Call me at 201-741-8490 if you have questions or need the name of a good banker who is expert at FHA mortgage loans.