A Case for FHA loans

There seems to be a lot of disdain for the old FHA loan these days. Many sellers and listing agents do not like to see a purchase contract with an FHA loan rather than a conventional loans. The worry is that these loans have stiffer requirements for the seller and take longer to settle. A FHA government loan also many not seem attractive to a buyer because the mortgage insurance premiums have gotten more expensive. Today a buyer can put a bit more money down and seek a conventional loan if they can afford the extra money..

However, aside for the fact that a FHA government backed loan takes less money down to get int,o and is easier for a buyer to qualify, there is one very important reason why this type of loan is a great loan to have if you are the owner of a home. This reason is that a FHA loan can be assumed by a qualifying buyer. What exactly does this mean to you? Well interest rates today are insanely low. Everybody agrees that they will have to go up. Historically the average interest rate over the past three decades has ranged between six to eight per cent and to really have a strong economy will have to go back up to these levels.. And I have been around long enough to remember when rates were briefly at 17 per cent. Believe me that was not a fun time to be a Realtor.

If you have a very low rate government backed loan on your home then if the market goes up-especially if rates go up and the housing market softens, then you actually may have a valuable asset. Ask yourself this, in a slow market with higher rates, if you are trying to sell a home that has an assumable FHA home and your neighbor is selling the exact same home, then all things other things being equal you then have a much more attractive bargain. Imagine if you will a real estate market where interest rates are around ten per cent. (Yes, it can happen.) And your home can be bought with its assumable four per cent mortgage. That would be a pretty sweet looking deal in any market.

So think twice before you get your new loan. Perhaps a FHA loan is a better investment in the long run. If you want to read more and go into the numbers involved here is link to a good article in the Washington Post from 2010. The information is still relevant to today's market.

Condo Buyers Need to Beware

I am getting a lot of calls lately from first time buyers looking to buy condos. Primarily because so many people are priced out of the market for single family homes and townhouses. With the lower prices these days there seem to be a lot of good condo deals on the market these days. However, all is not as it seems and I caution  prospective condo purchasers to be careful. Right now, I can think of three problems associated with condos that are popping up and making it very hard to get loans to purchase or for sellers to sell.

Non owner occupancy. There has been a flood of investors snapping up condos for cheap. They are mostly all cash buyers looking for attractive short sales or bank owned properties. In the past many of these investors were rehabbing and flipping the homes-which is a good thing. However, with the low costs of units and cheap financing many are buying condos in order to hold and rent them out. Typically, rental properties get less care than owner occupied properties and if there are too many rental units in a condo development then it becomes very difficult to obtain financing for prospective buyers who are looking to use FHA or minimum down conforming loans. Currently FHA guidelines allow no more than 50% of the homes in a condo project to be non-owner occupied, and a lot of projects are failing to make the grade and losing FHA approval.

Delinquent condo association payments. FHA refused to approve a project where more than 15 per cent of the units are 30 days or more behind on the payment of condo fees to the association. With the state of the economy this is a growing problem as many condo projects are now falling above this level.

Condo projects that are entering a new maintenance cycle. During the last boom in the late 1980's many apartments were rehabbed and converted into condos. These units are now entering into a 25 year cycle where key upgrades and repairs are needed. Things such as expensive new window or roofs or parking lot repaving come at about this stage. These major repairs cost big money and a lot of condo projects have underfunded reserve funds and just do not have the money on hand to pay for this work. When this happens it usually means that special assessments are passed on to the current unit owners and these generally are added to the monthly condo fees. I am seeing some units in the area where the monthly fees are topping $1,000 per month. When faced with the reality of this tough market many sellers have to cough up the full balance for these assessment at settlement. Smart buyers are checking and passing up on projects have a history of passing large assessments to the owners.

This does not mean that all condos are a bad buy, and certainly there are some very nice condos in the area. However buyers need to be very careful when looking at that condo "deal' in today's market. The best bet are newer condos or units that have been recently rehabbed and converted. In this case, FHA financing is usually readily available and you are pretty sure that you will have at least two decades before serious physical upgrades are needed. I really like some of the condo conversions that I am seeing in the District these days. Some really fine older buildings with modern units inside. A nice mix in my opinion. 

New limits to FHA allowable closing costs.

One of the major benefits to seeking an FHA (Federal Housing Authority) insured loan over a conventional loan is that the allowable closing costs contribution by the seller could be as high as six percent of the value of the home. With a conventional loan the maximun allowable amount is usually three per cent.

Well under new guidelines proposed by FHA this allowable closing help is going to be reduce to not more than three per cent. This will have an impact on home sales as many first time purchasers are short on cash and need the maximum closing assistance to buy a home. I don't think the impact will be serious but it is not going to help in this slow market that we are currently mired in. The date is not set in stone but look for this change to come about in the next month or so.

FHA loans getting tougher

Over the past decade the time period it has taken to get a loan processed had dropped significantly. In the recent heady days of the real estate boom a good lender could process a loan in about two weeks or less.

Well, those days are over for two reasons. One is that most loans processed these days in the Silver Spring market are FHA, government loans. Traditionally these loans have taken a little longer than the conventional loans that we mostly saw during the recent boom. The other reason is that all loans are taking longer due to more restrictive guidelines and tougher appraisals.

Investors took a big hit from bad loans in the past few year and are watching loan applications more carefully. The FHA loan pipeline is clogging up a bit as a result. If you are selling or buying a home where an FHA insured loan is part of the contract then it is better if you plan on the loan taking up to six week to get approved. A lot of Realtors are still putting 30 days to settle in the contract that they are writing but I think this is overly optimistic these days. I am advising my clients to expect at least 45 days from ratification to closing.

Those of you who have been around long enough will remember a terrible period back in the late 1980s where it was taking FHA loans up to 120 days to close. We were caught in another boom market and the appraisal pipeline was so backed up that you just could not get one scheduled for at least 90 days. It is unlikely that we will experience that sort of delay this time around but do expect your loan to take a little longer to close.