Sellers and Agents: Don't Rule Out FHA Buyers

I was just working on a finance flyer for a listing agent…something I haven’t done in years!   Anyhow, the home is priced at $442,000 and she requested a 30 year and 5/1 ARM both with 20% down for scenarios…I added FHA at 3% down.  The property is in King County and would qualify under the FHA Jumbo program.   Until the end of the year (I suspect the “economic stimulus” loan limits will be extended beyond) Sellers have an opportunity to expose their homes to buyers beyond the normal “jumbo” or conforming market.  

Here’s a comparison:

30 Year Fixed with 20% down at 5.75% (APR 5.902%).   Principal and interest payment = $2,064.  Cash needed to close = $88,400 plus closing costs of approx. $6,000 (the rate is priced with 1 origintation/discount point) plus prepaids.    This rate requires a mid credit score of 720 or higher. 

5/1 ARM-LIBOR with 20% down at 5.25% (APR 6.810%).  Principal and interest payment = $1,953.   Cash needed to close = $88,400 plus closing cost of approx. $2,350 (the rate is priced with zero discount/origination points) plus prepaids.   This rate also requires a mid credit score of 720 or better.

FHA-JUMBO 30 Year Fixed with 3% down at 6.25% (APR 7.030%).   Principal, interest and mortgage insurance = $2,850.64.   Amount needed to close factoring down payment and closing costs is $20,350 plus prepaids.   FHA is not credit score sensitive (yet) and buyers who are truly FHA approved have done so via a “fully documented” loan.   They’re pretty darn serious!

When you compare 20% down conforming to the 3% minimum down required for FHA; it’s the difference of having approx. $100k for your down payment and closing costs to having a quarter of that.   Some folks have the income (they still have to qualify with FHA) but they’re shy on that kind of savings.   Maybe it’s their first house or perhaps their savings is tied into their retirement or children’s college fund.   These are buyers you don’t want to rule out.

FHA Jumbos allow buyers to have a loan amount of $567,500 in King, Pierce and Snohomish Counties with as little as 3% down payment (some lenders require 5% down).    With second mortgage’s evaporating and fewer “piggy back” options available, buyers who have less than 20% down where their loan amount will be over $417,000 will be considering FHA as an option.    For example, sales price of $625,000 with 10% down (loan amount $562,500) would be an excellent FHA JUMBO candidate…only offering cash or conforming products will pretty much limit your buyers to those with 20% down.   FHA buyers do not have to be minimum down…they can be less than 20% down or have a credit score or perhaps one of the borrowers has a mid score of 679.

I’ve written before about why Sellers should consider FHA…however with the temporary expanded loan amounts…now it’s even more compelling.   

35 thoughts on “Sellers and Agents: Don't Rule Out FHA Buyers

  1. Leanne, great question! YES FHA loans are ASSUMABLE subject to lender approval. I have an FHA class for agents I’ve had in the works and I’m going to add that useful tidbit–thanks for reminding me. 😉

    King, Snohomish and Pierce County have the following loan limits through December 31, 2008:

    1-Fam: $567,500
    2-Fam: $726,500
    3-Fam: $878,150
    4-Fam: $1,091,350

    Borrowers must occupy one unit and will received owner occupied pricing at minimum down. FHA is HOT!

  2. I think FHA is really a great thing. Buyer can have seller pay all the closing costs too, as well, the down payment can be a gift from family … if that doesn’t sound better than zero down, I don’t know what does! 🙂

    Buying today with a low interest rate can be a nice thing for the future if you decide to sell, your property may well have a lower than market interest rate in the future, and even if someone has 20% down payment, they well might choose to assume your good rate.

    Rhonda, I definitely think agents need some FHA classes … there are many out there who’ve never done an FHA loan!

  3. Leanne, FHA will become more attractive once Fannie Mae’s new version rolls out this weekend (a post is in progress) which will result in more borrowers having “Expanded Approval” with a higher rate or they can opt for FHA.

    My power point presentation is all done… I just need to find a good phone-conference system. Back in my title days I used to teach classes…I’m looking forward to this. FHA is a great program that many just don’t understand.

  4. RE Agent helps Seller accept FHA Jumbo offer! {seesmic_video:{“url_thumbnail”:{“value”:””}”title”:{“value”:”RE Agent helps Seller accept FHA Jumbo offer! “}”videoUri”:{“value”:””}}}

  5. This is a bit off-topic, but I am wondering what type of pulse the local real-estate professionals are feeling in our Seattle area market this spring? Does it seem as if the gloom that was growing during the winter has passed, and that buyers are pretty active anyway?

    From Ardell’s statistics it looks as if properties are moving, so buyers don’t seem to have gotten too skittish.

    I notice 1600 hundres square foot 3 bed/2 bath/2 car garage 1970s homes going on the market on my street (in east Bellevue) for nearly $600,000, which indicates that sellers don’t think there is much downward pressure.

    In short: can we now officially say that the Seattle area has been immune to the credit crunch? Buyers may not be able to find the same no-doc loans, but they have just increased their down-payments, or moved to FHA, so no harm done…

  6. Sniglet, I don’t think any individual agent has the kind of feel you’re looking for, because no agent personally sees enough of the market. All we can go by is the stats. Even a broker who reviews transactions at the county’s largest agency wouldn’t personally see enough of the market.

    Looking at the stats, so far for May the median (KC SFR) is looking decent, but that bounces around a lot. And the volume remains depressed from the prior two years, and might not even show a seasonal bump over April (but month end closings might change that). I look at pendings, but don’t track (record) the results, but I think they’re looking reasonably healthy.

    But I think it would be hard to say Seattle was immune to the credit crunch when volume is off roughly 33%. Prices are doing okay (although we’ll not have the super strong run-up of 2007), but when volume is off by that extent obviously credit has had an effect.

  7. Kary,

    Speak for yourself. Of course I have “a feel” and answer to Sniglet’s question…but I also have a 1:00 appointment and I’m still in my robe 🙂

    Will answer when I return.

  8. Sniglet, I’m not so sure you can say we’ve been immune to the credit crunch. I’ve seen it (financing) impact people needing to refi more than home buyers. Finding comps for refi’s is challenging–especially with the guidelines lenders are requiring and then fewer sales. With jumbo-conforming rates coming down to near conforming levels, we may see more refi’s to help home owners into better rates.

    I’m seeing more people getting preapproved to buy homes. Consumers are wanting to take advantage of lower rates. In my opinion, the crunch is hitting refi’s more and areas outside of Seattle/Bellevue.

  9. Rhonda, great post that outlines the kinds of tradeoffs that people should be considering before getting into a loan.

    Your post also nicely illustrates the reason I dislike the new FHA-jumbo program. I don’t know if FHA has a hard and fast front-end ratio, but let’s say it’s 30%. That means the minimum annual income for your example family under the FHA scenario is about $115k. If they have any meaningful debt, they’d have to earn even more.

    Seriously, you’re pulling down $115k+, and you can’t save $80k for a down payment and your credit is less than prime? So FHA is going to be helping upper-middle class spendthrifts now?

    Press accounts have labeled so called subprime buyers as a driving cause behind the housing downturn. These lower-and-moderate-income folks, who are often profiled as immigrants or other minorities, are being characterized as not responsible or savvy enough to become homeowners.

    However, maybe we should be recognizing that higher income people with dinged credit histories and no savings cushion are simply not ready to buy a $625,000 house, and the government might have better areas to focus on.

    I’d much rather see FHA pay more focused attention to lower income borrowers that have saved $ and cleared up their credit records. The current FHA/HUD purchase assistance programs just don’t work for people in the area (or any high-cost area).

  10. laxtosnoco, you wouldn’t have to have all of those factors you’ve referenced to consider an FHA loan “pulling down $115k+, and you can’t save $80k for a down payment and your credit is less than prime”…however yes, that person/couple could qualify for an FHA jumbo.

    It could be that they do have 20% down but they don’t want to use it in their equity–they’d rather remain more “liquid” in this economy.

    How about the husband who has a 720 mid score and the wife didn’t realize there was something on her credit like a small medical collection and her score is 658…and they need both of their incomes to qualify (I hate it when spouses are removed from loans for prequalifying purposes). That 658 score, even if the husband is the primary wage earner, is what will be used for pricing…and will cost 1.75% in fee extra. Based on my example, for the same 20% rates quotes above, the additional cost due to the small medical collection = $6188. Or it will cost them more in rate by about a 0.5% ($113 more per month/$1356 per year…just in mortgage payment…not even factoring the impact of the higher interest over the life of the loan)…assuming they’d qualify with today’s guidelines.

    With Fannie Mae’s new guidelines coming out over Memorial Day weekend, we’re going to see more FHA buyers…they may even have 20% down.

    I’m with your on the DPA programs (I think that’s what you’re referring to in the last paragraph)…I’ve never been a fan. BTW…I’m finding the FHA wants to keep the front end ratio lower than 38%…back DTI around 45%.

    I also think a bigger issue with the housing problems was over-stated income loans vs. subprime full doc. Those stats I would find interesting. 🙂 I’m glad you liked the post!

  11. laxtosnoco, I’m running some quick figures and the FHA buyer(s) could qualify with a monthly gross income of 9k (maybe less or more depending on property taxes and monthly debt. I used $900 a month for debt).

    FHA is not subprime. I think the confusion is that many mortgage brokers who were not qualified to provide FHA mortgages were able to get into the FHA market/demographich by schlepping subprime or alt-a products to consumers who didn’t realize or were not informed of other options available elsewhere. I’ve heard some LO’s bash FHA when in reality, it’s because they simply didn’t have it available.

    I’ve done FHA loans for 8 years and my share (fewer than most LOs) of subprime loans over the past few years and there is a general difference in clients. I would also say there are people with “subprime habits/characteristics” and there are people who needed a “subprime loan” due to circumstance (not habit).

    I would say that in general most of my FHA clients have been first time home buyers. If an FHA borrower had “subprime habits”, they would need to have changed them long enough to have at least a 12 month track record of good behavior (no late payments).

  12. In 2001, my husband and I had a combined income of about 55k per year (and no debt). We were pre-approved via FHA for $200k, though we didn’t buy. Instead, we opted to save our pennies for a few years in hopes of getting a better rate via conventional financing.

    Two years later, when lending standards had relaxed considerably, we were strongly pushed into getting pre-approved for up to $500k BY OUR LENDER! Now, our COMBINED income at that time was about $60k, and we had 5% down (through years of painful savings). We had to stongly advocate to OUR lender into ONLY preapproving us for $300k, as that was the maximum we figured we calculated we could have afforded (and we had zero debt and no kids) at the time and in the foreseeable future.

    I wonder how many of the housing problems out there are from people who were “talked into” getting pre-approved for a higher loan than they should have based on income as opposed to overstated incomes… Does anyone have any stats about this?

    It might help to point out that this was in San Diego…so the lender culture may have been a bit different (read: predatory) than in Seattle. I’d also like to point out that we, as sellers in a very soft SoCal market in 2006, LOOKED closely at the financing package that potential buyers would procure. We turned down an offer that had a short-term ARM and finally accepted a lower offer where the buyers were able to get 30 year fixed rates. (We had alot of pride of ownership and didn’t want our home to fall into foreclosure).

    FHA wasn’t on anyones sheet at that time, but I’d hope that potential sellers would consider FHA again, as it seems to me that these buyers have lower risk and therefore are more likely to keep their home.

  13. Lesley,
    I often encourage buyers to get approved for a higher amount–within what they’re comfortable with. It’s up to the consumer to buy what they want–no one forces them to buy more. The preapproval is almost like a credit limit–no one is saying to “max it out”. just because you can become approved for x doesn’t mean that you should buy x.

    I have borrowers who are well qualified and buy much less–they often don’t want their agent to know how much they’re qualified for.

    The borrower is and should be “the boss”. If their LO or RE agent is not looking out for their best interest, they shouldn’t work with them. The borrower is who is paying their tab.

    Why didn’t you leave your LO?

  14. Hindsight is always 20/20….. In retrospect, we probably should have, but I got her into a bidding war for rates/points (ended up with a 5/8 reduction in rate from original quote) and we had to close in 23 days and all of thge paperwork was already on file.

  15. Re Sniglet #6 and not to hijack…I mostly agree with Kary for Rhonda’s sake. If Sniglet wants a longer answer, he can ask it on one of my posts. 🙂

  16. Rhonda, FHA is way better than subprime. FHA is more paperwork, and yes, the appraiser may be more stern on the house, ie, that old roof likely won’t pass & seller will need to put on a new roof, but FHA loans are solid loans — and just to repeat myself, they are assumable, the new buyer qualifies and seller has a release of liability in that process.

    If rates go up the next few years, those with high balance FHA loans might be the most popular sellers.

    The main thing agents and buyers need to realize is that they MUST work with a lender who knows and understands FHA, not just someone who ‘claims’ they do. Rhonda, do they still call that a direct endorsement FHA lender?

  17. Rhonda,

    Your Title says that Agents and Sellers shoudl consider FHA, but you didn’t address the pitfalls to sellers and seller’s agents. As Leanne points out, isn’t it more likely that the seller will have more problems such as needing a new roof, even if the inspector didn’t call for one? Isn’t there potential for higher repair costs and improvement costs for exterial railings (something many Seattle homes don’t have) and other FHA expectations of the property? Is that a myth?

  18. Ardell,
    It’s more of “old rules” than a myth. Every loan (conventional and FHA) will call for code violations…the only difference between FHA and conv. roof requirements is that FHA will only allow 3 layers of a rolled roof. I did write about the new guidelines on my previous post.

  19. Leanne, you’re an FHA pro! You are correct: direct endorsed FHA lender or a lender who has their “Full-Eagle”. Our company has been a direct endorsed lender (Full-Eagle) since our inception 30 years ago. Sorry…for the promo–I’m proud of the fam damily.

  20. I should add…there are different levels of FHA lenders…such as a “mini eagle”.

    I would ask lenders if they are
    1) direct endorsed HUD lender
    2) have an on-site (on their site!) FHA underwriter
    3) fund FHA loans from their credit line

    This will always be an advantage over “brokering”.

  21. 🙂 I’ve never heard the term full-eagle or mini-eagle!

    I lived and breathed FHA in the 1980’s – most of us did. I loved FHA, it was a great product for getting buyers into homes. And, I still have some of those same buyers living in those same homes (time for them to call me, don’t cha think?!).

    There was one particular appraiser we dreaded, since back then, whoever was next up in line to get the appraisal order was the one who did it. This appraiser just loved work orders! But, other than that one person, I have never found FHA to be totally unreasonable. And, on the occasion, such as the appraiser calling for a new roof – if the licensed, bonded building inspector says the roof has 5+ years left, I’ve had FHA not require the new roof.

    Lender-required work orders are always annoying, but they are going to be more of a fact of life than in the last ten years or so.

    Rhonda, I don’t remember if we ever got an answer to this question — once a house has an FHA appraisal on it – does that ‘stick’ with the property for 6 months, even if that sale didn’t go together? That used to be an occasional problem.

    As agents, I think we’re in a new era. It is going to be critical for listing agents and buyers agents to make sure the buyers pre-approval is through a very strong lender, and for listing agents who aren’t impressed once talking to buyers lender, to consider requiring a buyer to make a change to a lender of sellers choice (or at minimum be pre-approved by same). I know it is difficult to convince someone that their choice of lenders may not be best, but you want a sale that can close, not one that falls apart.

    Every single time that I’ve had lender related problems has been when a buyer has worked with an unknown quantity lender. Before any mutual acceptance, call the lender, make sure you feel they are experts, and if not – make some changes on who everyone is going to be working with.

  22. Leanne, an FHA appraisal does “stick” with the house and the appraiser for 6 months and yes, it can be an issue. Just this year, our company had to go to HUD to force a lender who would not release the FHA appraisal to us when the client had decided not to work with that lender. We had to go to HUD since this lender would not cooperate…it worked although it was a drastic measure we had to take.

  23. Pingback: Get Preapproved before Memorial Day Weekend: More Changes with Fannie Mae | Seattle Real Estate ~ Rain City Guide

  24. Rhonda,

    Being both a Realtor and mortgage banker, I believe pre-approved FHA buyers are gold. Though there have been minor changes in FHA guidelines and pricing, compared to the tumultuous and gut-wrenching shift we’ve seen in conforming guidelines and comforming PMI in the last 4 months, FHA programs are rock solid.

    Pre-approved means they’ve been scrutinized, scrutinized, scrutinized and I feel much more confident in 1) the FHA program the buyer is qualified for hasn’t changed and 2) there are more options to handle problems between contract and closing. I had 1 client purchasing a Spokane home on an FHA mortgage who changed careers between contract and close and we didn’t have a problem!

  25. I wondered about that, Jillayne… malloam is right about FHA being a great program…HUD does have some pretty strict rules and recently whammo’d a local mortgage company for violations.

  26. Yes, I’m very aware that you can’t choose to work as a real estate agent and originate FHA loans. If I’m working on getting a client pre-approved and it looks like their loan is headed FHA, I introduce them to another originator on my team who takes over and originates their loan. My understanding is that FHA doesn’t allow you to oriniate any FHA loans if you are working as a real estate agent, including cases such as FHA refinances or purchase-money loans where you aren’t the agent.

    Not to get off topic from the original post, but I’ve wondered why FHA has this standard, or more importantly, why VA and conforming DON’T have this same standard?

    I’ve found it very satisfying that as an agent I have a fiduciary responsibility to my clients, and very troubling that originators don’t. Doesn’t mean that the originator can’t choose to take a findicuiary responsibility for their client, but they aren’t required to.

  27. Gee Aaron, back up there in comment #29 it sure sounds like that FHA buyer was your “client.”

    The answer to your question you pose in comment 34 is in the HUD manual, which you should have right there in your office.

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