Common Obstacles to FHA Loans and How to Overcome Them
If you’ve been shopping around for a home mortgage loan, recurring options you might have come across would be FHA loans, popular for being relatively easy to qualify for.
Contrary to general perception, note that the Federal Housing Administration would not be issuing you the loan; the entity’s only responsible for offering financial recourse to the lender approving the loan. Simply put, an FHA loan is a government insured, privately granted loan. If you’re one among the hundreds of first-time homebuyers who incidentally don’t have a perfect credit history and cannot afford to make a 20% down payment, chances are that this is a strong loan option. So how do you overcome these common obstacles to FHA loans?
1. The property is not “livable” prior to buying it
It’s in the interest of both the homebuyer as well as the lender that the desired home is in perfect condition. This means that the home must certify as meeting the property inspection requirements regarding safety or health hazards.
Chipped paint, issues that may seem as minor by default for some homebuyers, might cause a delay but may be something that can be resolved with the seller. In some cases with foreclosed homes, these properties may generally lack necessities such as plumbing and other basic essentials that one would require for something to be deemed as “livable.”
Foreclosure properties and short sales may offer what appears to be a great deal but sometimes tenants will damage and strip the property of basic utilities and appliances prior to leaving the home in the bank’s possession. Previous owners have removed cabinets, appliances, plumbing, lighting fixtures, and anything else they may deem as valuable before leaving the property. In these cases, the property is often disqualified for FHA loan consideration.
In these unfortunate situations, your problem goes something like this:
you can’t buy it because it’s not fixed and you can’t fix it until you can make the purchase,
…especially if it’s not merely minimal repairs and a call from the HUD inspector. In this case, the FHA 203K Streamline loan may be what you’re looking for. The FHA 203K program allows homeowners to borrow up to $35,000 to make repairs to nonstructural elements of a property. This essentially helps you get the property up to where it needs to be prior to moving in.
2. The debt-to-income ratio is at skyrocketing levels.
You work hard each month and for that, you receive a certain dollar figure as income. The debt-to-income ratio is basically a personal finance term that considers what you earn against what you spend every month as you work to pay off debt like student loans, credit cards or a car payment.
As lenient as the FHA loans are in their requirements, they have defined a standard as it applies to your debt-to-income ratio. The general consensus is to allow borrowers to spend up to 30% of their monthly income on items like mortgage payment.
Your ticket out may be the FHA’s Total automated underwriting system. This program usually allows individuals to have a higher debt-to-income ratio than what’s typically accepted for a manually underwritten loan. This system also relies on a credit report that shows no major negative items or strikes like bankruptcies or other delinquencies.
But again, it’d be folly to think that carrying a missed mortgage payment would allow you a green signal for the loan; you have to make (two) compensations against it at least. These include making a down payment that is greater than 10% and providing evidence to prove a history of making timely, large housing payments.
3. The FHA appraisal is less than the sale price you agreed upon.
With a booming real estate industry, and an increasing number of foreclosed properties and short sales available, it’s probable that the value provided by a property appraiser is not ‘accurate’ because there was no comparable data available to determine the property’s value accurately. Also, during the real estate boom, many property appraisers were met with angry sellers and buyers for improperly inflating property values. Perhaps they are still sensitive from that backlash because now there has been a trend of homes being appraised for too low.
A considerably lower appraisal value than the decided sale price should, however, be no reason for you to walk away. There is a solution here if all parties are ready and willing… Very simply, renegotiate the sale price of the home! If an appraiser isn’t going to budge on their determination, no bank will jump to an opportunity to help someone overpay for a home.
If you are an emotional buyer and refuse to walk away from the deal, at best, you would need to put down a larger down payment to bridge the gap between prices here but that is a long shot. Since that’s almost always not possible, you can work to renegotiate with the seller and ask them to lower the price to the appraisal through an appeal process. In that effort, it is helpful to also ask that the appraiser be at least from the neighboring county if not the same and that they have an appraiser certification.
If all else fails, as a buyer you are best off moving to another property choice if this attempt fails.