Crazy weather here in Chicago these days, folks! Yesterday - 84 degrees, sunny! Today - 46 degrees, super-windy, gray and cloudy! They say Summer will be here before you know it. Many of us in Chicago are beginning to wonder!
If you read the news on the web, and listen to many Mortgage Professionals, you might think FHA Loans are the "silver bullet" to bring around the housing market. Have a low down payment, less than perfect credit? Try an FHA loan!
Have no down payment? The FHA liberal gifting rules allow for even the SELLER to contribute to your down stroke - subject to certain guidelines, of course.
Declining Market Zip Codes from Mortgage Insurance Companies? Ultra-closing costs? NOT WITH FHA!
But all s not perfect in FHA land!
Many FHA loans have personal reserve requirements that are somewhat inflexible. And their Mortgage Insurance Premium, although it can be blended into your mortgage amount, is sometimes higher than Conventional PMI.
FHA Appraisal Requirements are still very tough - the three FHA sales we completed this year each had a lengthy list of mandated repairs which needed to be completed before closing. GFIC Electrical Outlets. Properly-positioned light switches. Maximum roof layers - even for properties sold in distress.
And a real crazy one - peeling paint must be removed and repainted! Even if there is no chance of lead based paint - for newer properties constructed way after the 1978 Lead Paint ban. Even it's the middle of winter and any new paint would flake off within days of closing. It doesn't matter - rules are rules, the appraiser would say!
In this market, many properties are sold in distress situations. The seller, often facing a short sale or pre-foreclosure, has no excess money to complete FHA-Mandated Repairs. Sorry - no choice! No repairs, no sale - irregardless of the discounted price the property sold for!
As they have in the past, many home sellers balk at accepting an FHA-financed loan! They are afraid they will be bullied into making costly repairs to their home in order to sell. No flexibility here - again, no repairs, no sale. And the buyer's offer is summarily rejected.
Resale condos offer the biggest challenges!
The FHA Spot Approval Checklist, via Mortgagee Letter 96-41, written in August, 1996, effectively disallows loans to any condo association with the "Right of First Refusal" on new sales. Most newer condo declarations deliberately avoid "First Refusal" language.
But a few of them still have it, including one North Side Chicago Development whose builder decided to put such language in his documents four years ago, to, "avoid the riff-raff that many FHA borrowers are!" (Believe it or not, that is what the developers Property Manager told me!)
Fact is, in 2004, when this particular condo project in the Albany Park Neighborhood of Chicago was converted, most low-down-payment borrowers avoided FHA, instead opting for Sub-Prime.
Anyone find a decent high-leverage, sub-prime loan lately?
New Condo Projects must be at least 90% sold for Spot Approval. At least 51% Owner Occupied. Have no more than 10-20% other FHA borrowers within the same project, depending on its size. No additional phases planned. No special assessments planned or under consideration. And a minimum one year since the Condo Board was established.
Any waiver to the slightest variance of these rules? Nope - according to the FHA Resource Center. NO FLEXIBILITY. Sorry - look at another building!
In 2008, we ended up closing ONE FHA transaction so far - only after the Seller re-painted gutter trim, updated GFIC Outlets, and replaced his Roof - all in the middle of winter, at a cost of over $5,000. Despite the fact he sold at a very low price, in distress.
In the second FHA deal - another single-family home - the seller agreed to settle on normal inspection repairs, but refused additional repairs mandated by the FHA Appraiser.
Our third deal just died - the condo has a special assessment for masonry work, which will be paid in full by the seller at closing. No dice, however - no special assessments for condo projects being considered for FHA financing.
In the case of many FHA loans, the borrower has no choice but to not buy the home or condo. In the olden days (say, 2005), lenders would routinely waive or "bend" certain requirements to get the loan funded. Some of these should never have been done, in retrospect.
But what we have now seems to be the opposite end of the spectrum!
I'm sure, on many transactions, FHA-guaranteed transactions go smooth as glass! However, here in Chicago, and on our Team - we haven't seen any of them yet!
Any thoughts, experience, or advice for a somewhat perplexed Real Estate Practitioner trying to sell a few affordable properties to modest-income families? Would love you to share!
DEAN & DEAN'S TEAM CHICAGO