No FHA Financing Accepted - Buyers and Sellers Lose.

I recently received a phone call from a frustrated mortgage lender. She has a significant backlog of pre-approved FHA first-time buyers that can't find homes that will accept FHA financing - and the deadline for the First Time Home Buyer Tax Credit is looming. She asked, "What's going on?"

In order to answer her question, I pulled the Active single family home listings in the $275k - $350k price range ("starter" homes in our Northern California market area) in the three cities with the most homes in this price range. The results shocked me.

Of the 43 active listings:

NO FHA

• 11 are short-sales, of which only 6 will accept FHA financing. Given the 3-4 month average timeframe for a short-sale decision, an offer written on these homes will not be approved and closed by the Tax Credit deadline.
• 3 are cash-only REOs. The properties won't qualify for any financing.
• 15 are REOs that will not accept FHA financing.
• 12 are "normal" sales that will not accept FHA financing
  

FHA OK

• 2 are "normal" sales that will accept FHA financing - a miserable 7% of the possible listings (excluding short-sales and cash-only REOs).

Is it possible that the 27 "no FHA" homes have such significant pest, health and safety issues that FHA financing would kill the deal? No. Does Conventional 10% down financing overlook all pest, health and safety issues? No.

Does the FHA financing exclusion serve the sellers? No.

Less than 5% of first-time buyers have the funds necessary for a 10% down payment ($27,500 - $35,000) plus loan costs. Limiting the financing to Conventional decreases the potential pool of buyers to 5% of the first-time buyers and bargain-hunting investors.

Let me play devil's advocate for a moment. Let's assume that an FHA Offer will cost the seller $5,000 in pest, health and safety repairs, but in exchange for that cost the pool of potential buyers will increase by 95%. This isn't a marginal increase in potential buyers, this is a huge increase! The potential cost will be offset by a higher net sales price.

I recognize that REO's are sold as-is. That being said, am I the only person who knows about the FHA 203(k) Rehabilitation loan that doesn't require any repairs prior to closing?


FHA Fix and Flip 90 Day Rule

Many of the homes in the best condition are investor fix and flips. Unfortunately, FHA will not provide financing on these properties until they have been owned by the investor for 90 days. These investors are extremely savvy. They purchase structurally sound homes that are a cosmetic mess. They fix holes in the walls, paint, put in new flooring, update the kitchens, add granite counters and new appliances. They are, for the most part, beautiful and turn-key ready for the market in 30 - 45 days. They are sold and closed by the time an FHA buyer is allowed to write an offer.

The 90 Day rule serves who? Protects who?

Are you facing the same issues in your markets?