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FHA LOANS! The Best Option for Low-Down-Payment Buyers with Blemished Credit? NOT SO FAST!

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!

Here is the HUD Website with links to detailed guidelines for the valuation of homes and condos under FHA standards.

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!


Comment balloon 8 commentsDean Moss • May 27 2008 05:29PM



I hear ya.....I have one now that needs the product, yet the other side will have issues.

Posted by Daniel J. Brudnok, REALTOR, SRES, e-PRO,ABR,GREEN,CSP (Berkshire Hathaway Home Services Fox & Roach, REALTORS - Exton - PA License #RS-225179-L / Delaware License #RS-0025038) over 10 years ago

Dean, you heard of any alternative for the cash-poor buyer?

Posted by Marc Baysek, Iron Horse Properties (Iron Horse Properties, LLC) over 10 years ago

I still love FHA loans. You dont have to have a home inspection, they use a different credit report card system, allow 3% down payment, MPI is half of PMI well a percentage might not be exactly half. Are you sure those arent old rules you have quoted?

Posted by Heather the Realtor Orlando, Lake Mary, First Time Home Buyers, Bank Owned Homes (LemonTree Realty) over 10 years ago

Hi Dean, My experience hasn't been the same at all. I grew up in the business doing FHA loans when they were one of the few options for low down payment borrowers, and back then you could count on a whole laundry list of property conditions that had to be taken care of before closing. Because they were so hard to work with  and other options opened up, Realtors refused to work with FHA buyers and they became less and less of a factor. Over the past 8 or 10 years I was only doing a few government loans a year. That all changed this year, and now about half my pipeline is FHA. I closed 5 FHA loans this month, and only had property conditions on one, a garage roof that needed to be replaced because it was dilappedated (and it was).

I think the bigger problem is that not all appraisers have truly bought into the changes in FHA, and are still using the old guidelines. With a good knowlegable appraiser the only issues should be those that could impact the health or safety of the home's occupants.


Posted by Peter Thompson, Chicago Mortgage Insight over 10 years ago


We are doing more FHA than ever and we have to, otherwise I do not believe we would have many closed transactions. 

You will see them become even more prominent now. 

Congrats your post was selected for the Blogger's Choice Selection!

Posted by Midori Miller, Digital Marketing Director (Talk 2 Midori, LLC) over 10 years ago

I heard that many of these requirements were old, and had been changed when they revamped the program.  Isn't that true?  Anyway, Congratulations on receiving the Bloggers Choice Award :)

Posted by Kathy McGraw, Riverside County CA Real Estate (CELLing Realty) over 10 years ago

Dean....  first off, are you a realtor or lender?  Secondly, on the lending side, are you dealing with a broker or a banker. Lastly, I just read a few of these comments and I agree with most of them. You are either quoting old rules or you have appraisers that have not adopted the new changes from 5 years ago or are just scared to change, in fear of losing their FHA appraisers license.

On another note, you also might be dealing with a broker that is selling to a lender and that route might be more negative. They might nit pick.  95% of my business has been FHA this year and I rarely have any of the issues that you have described.

Overall, just my .02, but I have been doing this for over 15 years. FHA is a lot less expensive overall. You compare mortgage insurance, but you fail to compare rate and what it will cost as a penalty if you have a credit score under 720.  Yes, 720. Sorry if my comment sounds harsh, but this is part of the reason why it's hard to get listing agents to accept FHA offers. This sole attitude in itself and the information supplied here, where the general public and other realtors would read this and now form an opinion based on your post.

I would suggest dealing with a lender that knows how to originate and close these types of loans.  Just food for thought if you are having so many issues.


jeff belonger

Posted by Jeff Belonger, The FHA Expert - FHA Loans - FHA mortgages - USDA loans - VA Loans ( Social Media - Infinity Home Mortgage Company, Inc) over 10 years ago

Hey, folks -

Thanks for all your comments!

A considerable portion of my business has been condos - a few low end condos that don't follow FHA guidelines, and their is no waiver or variance from FHA here.

We've done three houses with FHA loans since the beginning of 2008 - one through a Mortgage Broker, one through Wells Fargo, one through Chase.  All have had appraisal issues - peeling paint (on a house constructed in 1994), settling cracks in basement, leaky p-trap in kitchen sink, handrail to basement.

All were on distressed properties that would have sold completely as-is if the market were a bit stronger.  We all had to scrape to gather the money to complete these repairs.

I know my experiences aren't universal - but they have impacted us here in Chicago.

Perhaps, as this market continues, these will no longer be issues of contention.

Again - thanks for your input & experience with FHA loans.


Posted by Dean Moss, Dean's Team Chicago IL Real Estate Team (Dean's Team - Keller Williams Realty Partners Chicago IL) over 10 years ago

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