Friday, January 27, 2012 - Article by: Bert Carpenter - Certified Mortgage Consultant, NAMB Nova Home Loans -
One of the trends we are beginning to see more and more of is a seller listing a home for sale, and specifying cash or conventional financing only. You, on the other hand are approved for and want to purchase using FHA or VA financing. Why are sellers doing this and how do you get around it.
First the why. FHA and VA underwriting guidelines require all homes to meet certain basic health and safety criteria as a condition of approval. FHA and VA requirements are similar in many ways, so to ease this discussion, we will talk about FHA only.
When an FHA appraiser performs the physical inspection, they are required to look for certain specific items that do not meet these requirements. Some examples include:
Broken windows and exterior doors that are not properly weather-stripped to keep out the elements? Does the Garage door open and shut properly?
Are there broken or cracked tiles in "wet locations" in the kitchen and baths that could allow mold to grow? Does the hot water heater, air conditioner (in hot locales) or furnace (in cold locales) work?
Is there any evidence that the roof has leaked, and does the roof appear to have at least three to five years of remaining life?
Does water flow to all faucets and the toilets, and do they properly drain?
So what happens when the FHA appraisal inspector discovers one or more items that do not meet FHA requirements? The appraisal is given a "Subject to" value and the items to be corrected are identified. In order for the new loan to be approved, these items MUST be fixed and re-inspected. Even if the home is being sold "AS-IS" and the contract says the buyer agrees to accept the property "AS-IS", these items must be fixed or the loan will not be approved.
Typically the seller is the one that is expected to make and pay for the required repairs. Most sellers just don't want to fix anything today. So an easy out is to just say no to FHA. As a buyer, you always have the option to negotiate with the seller and agree to pay for some or all of the repairs, but the buyer is not obligated to do so which puts the responsibility on the seller.
One question I ask my buyers to ask of sellers is "Why won't you accept an FHA offer?" If the answer is related to the property's condition, my next question is "Why would you want to buy a home FHA won't lend on?"
Another reason a seller may elect to exclude FHA has to do with a provision in FHA guidelines that prohibits or limits property flipping. For the novice, property flipping is where someone buys a home, and re-sells it for an inflated price shortly after purchase. Many years ago the rules were established to ban this practice and a seller of a home had to own the home for at least 90 days before the property was eligible for FHA financing. The rules have changed several times, and today generally if the seller of the home acquired the property less than 90 days ago and the new sales price is more than 20% above their purchase price, the home is not eligible for FHA financing. An example of a flipped property is a home purchased by an investor at foreclosure sale (or auction) for $120,000. Upon receiving title, they spend $10,000 to remodel including new carpet/tile, appliances and paint. Based on the improved condition of the property, they offer it for sale at $150,000. Because the new sales price is more than 20% greater than their purchase price, the home is not eligible for FHA financing until the owner has held title for 90 days. So, if these conditions exist, the seller will not entertain an FHA offer in this 90 day window.
So how do you get around these reasons for not accepting your FHA offer?
In the case of flipping, the only way to get around this is to wait until the 91st day and make your offer.
If it is property condition, you must ask yourself what repairs might have to be made and are you willing to contribute to make them happen. This is where having a great Real Estate Agent comes into play.
Bert Carpenter, CRMS
Bert Carpenter ~ NMLS 40586 ~ AZLO 0911876
Nova Home Loans ~ NMLS 3087 ~ ALBK 0902429
An Equal Housing Lender
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