What strategies can a buyer use to overcome FHA prejudice?
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Both buyers and sellers agree that all things being equal it doesn’t matter what loan a buyer applies for as long as the buyer has approval. However, because of the hoops that FHA buyers have to jump through to get full loan approval, all things are not equal. With multiple offers on many of the homes in today’s Orange County housing market, it is difficult to have a competitive advantage as an FHA buyer. Here are some ways you can overcome seller prejudice to FHA buyers:
1. FHA loans require more repairs than conventional loans. Solution? Money. FHA lenders require their appraisers to note health and safety issues with a home. These items need to be repaired by close of escrow. For a home in good condition, this is probably not a big concern, but homes that have been neglected may need repairs with an FHA appraisal. Unfortunately, the only way to overcome this objection will be money, whether you promise at the outset that you will pay these costs if they come up or just offer a much higher price than the next buyer (usually $5,000+).
2. FHA loans take longer to approve. Solution? Get the right lender. The time to approve FHA loans went from a standard 30 days to 45-60 days last year as lenders and FHA itself tried to deal with the onslaught of buyers interested in the program. Today, some lenders have systems in place to close escrow in 30 days or less with an FHA loan. Align yourself with a lender who can close FHA loans quickly. Have them provide their FHA track record in their approval letter. Finally, get lender pre-approval (not just pre-qualification) in advance and make sure that approval includes signing the recent HERA/HOEPA disclosures.
3. FHA buyers are more likely not to qualify. Solution? Get pre-approved. If during escrow it turns out the buyer doesn’t qualify for an FHA loan, it’s likely the buyer will not qualify for another loan, because there are no other 3.5% down payment programs. A seller will often choose a 20% buyer over an FHA buyer, because if the 20% buyer doesn’t qualify for one program, there are other programs for 20% down that will work. If you are fully pre-approved, not just pre-qualified, that can go a long way toward easing the seller’s fears.
4. FHA requires more termite work to be done. Solution? Money. Termite work is usually split into Section 1 and Section 2 items with those items in Section 2 usually not required to be done by close of escrow. However, with an FHA loan, the Section 2 items need to be corrected by close of escrow. Section 2 items don’t come up very often, so this is not often an issue. However, you can answer this objection, by offering to pay Section 2 items and showing proof that you have funds to repair those.
5. FHA loans are more likely to have a low appraisal. Solution? Money. If the appraiser determines that the local market is declining and the loan is for more than $417,000 and the down payment is 5% or less, then a second appraisal is required. The second appraisal gives two chances for a low appraisal to come in on the home, which can happen in our current market environment with fewer sales, but rising prices. Appraisers can have a tough time, despite multiple offers, justifying the result of a bidding war by just looking at the most recent sales. If you have the funds, and think the home is worth it, you can offer to make up for any difference between the appraisal price and sales price at the outset.