September 2, 2009 Leave a comment
I am writing this post to address the stigma that is out there concerning FHA financing. In the past, FHA financing posed many challenges to a timely closing (or a closing at all). Much has changed over the past couple years. FHA loans have gained popularity quickly in the San Francisco Bay Area…and for good reason. FHA loans are the only low-down payment option left in today’s mortgage market. It is a shame to see that sellers have been turning down the highest bid because of FHA financing. To my surprise, I’ve recently heard that a seller accepted an offer for $10,000 less with a closing for 30 days, solely because the buyer with the conventional offer was putting down 20% for a conventional loan.
There have been many changes with FHA guidelines from the past and with the mortgage industry itself that actually make an offer with FHA financing even more appealing than an offer with conventional financing.
1. Timely closings : When the FHA loan lmits increased in the San Francisco Bay Area recently, lenders were not staffed properly with FHA underwriters. FHA requires that loans that they insure be underwritten by underwriters who have been approved by HUD. There was a scramble by lenders in this area to get their underwriters approved by HUD. This translated into longer turnaround times for loan approvals. It was not uncommon to wait 10-15 business days to get an approval. Now the difference is minimal depending on the lender that you choose. It is not difficult to find a lender with 72 hour turn-around time for approval.
2. Lower credit guidelines: Because FHA will insure loans with higher debt-to-income ratios and lower credit scores than conventional loans, the chance that the FHA loan will close is much higher. These days, it is difficult to find private mortgage insurance for loans with deb-to-income ratios over 41% and credit scores under 740. Most FHA lenders will approve loans with credit scores as low as 620 and debt-to-income ratios up to 55%. This means that there is a larger margin for error with an FHA loan. If a credit score drops, or if there is a new liability to take into account, there is still a loan for the most part.
3. Appraisal Issues with conventional loans: Due to some recent, mis-guided legislation, loans with conventional financing may take longer to close because you must order the appraisal from an appraisal management company. The broker or bank is not allowed to speak to the appraiser, and many times the appraisers are not paid fairly by the management companies. This results in longer turn around times and poor appraisals. FHA loans do not have this requirement. You should be able to lift appraisal and financing contingencies with a good FHA loan officer within 15 days. I have been conservative by asking for 15 days for appraisal, 20 for fiancing, and 30 for close. I have a transaction that will be ready to close in 3 more days. We went into contract 15 days ago.
4. FHA property requirements: FHA has become much more accommodating with regard to property requirements. In the past, it was not uncommon for an FHA loan approvals to be riddled with conditions for repairs prior-to-close. This is not the case anymore. The new FHA loan requirements are very close to the specifications set by fannie mae and freddie mac for conventional financing.