First a little history: FHA stands for Federal Housing Administration, an entity created by the The Housing Act of 1934 which was designed to increase home ownership by operating different loan insurance programs. So when someone says you have an FHA loan, it doesn’t mean the Federal Housing Administration gave you the money, it means that the FHA is insuring the principal amount that your chosen bank lent you.
With an FHA a buyer can finance up to 97% of the sale price meaning a potential buyer will only need a 3% down payment. The borrower must meet standard FHA credit qualifications. Additionally the home being purchased must also pass an FHA appraisal and meet the other FHA guidelines.
Now that the 80/20 and other creative financing options are off the table I have seen a rise in the number of borrowers utilizing an FHA insured loan. Out of 8 contracts I have that are scheduled to close between September and October, 5 of the borrowers involved are using an FHA loan.
If you are using an FHA loan these days, it is important to choose a home that will pass an FHA appraisal. In this market that can be kind of tricky. There are so many foreclosures, short sales and handyman specials to sift through. Obviously everyone is looking for a good deal and foreclosures can be a good options, but they won’t all pass an FHA appraisal. If you are using an FHA loan there are may hurdles you can run into in terms of the home meeting the guidelines. Does it need significant repairs? If so, can the current owner of the property have them repaired prior to close? If it is a condo, is there enough money in reserves to meet the FHA guidelines? If it is condo, are enough of the unit owners, owner-occupants?
I am not suggesting that you avoid Bank Owned properties and condos altogether. But I do think it is important that you do a good amount of investigation prior to making an offer. By working with your lender and Realtor you should be able to get a good idea before you ever write an offer if the house will conform to the FHA guidelines.
It is very possible to find a foreclosure that will pass an FHA appraisal. But the risk is having something called out on the appraisal and then not being able to have it repaired prior to close. Most banks state in the MLS listing that NO REPAIRS will be done to the property.
If, however, the home is owned by an individual that is willing to address any FHA predications, even if it needs a new roof or electrical panel, you are much more likely to have a smooth transaction.
I think FHA loans are good products and I believe that the contingencies built in are really in the best interest of the buyer, but I think it is important that you do your due diligence prior to writing a contract so that you don’t find yourself out $800 (inspections) and in love with a house that simply will not fit your financing package.