How to Make Your House FHA Mortgage Eligible
An FHA, or Federal Housing Administration mortgage is popular with first-time home buyers. It allows those with solid credit to buy homes with a small down payment, as low as 3.5%, so it is understandable why many home buyers choose the FHA option.
With around 30% of home buyers using FHA loans, there is a good chance you will get an offer from an FHA buyer for your home. If you want to accept that offer, you will need to have a home that meets the requirements of the FHA – which can be stringent and have derailed more than a few home sales that looked like an otherwise perfect fit.
In other words, you should want to know how to make your house FHA mortgage compliant!
Given that not every home qualifies for an FHA mortgage, it’s important to understand the regulations. What seller wants to accept an offer from a buyer using FHA financing only to find out there is a significant roadblock in the middle of the transaction? Fat chance there aren’t any who want that!
Obviously, you want your real estate agent to be familiar with how FHA financing works. There is no point in accepting an offer from a buyer with an FHA mortgage if the home isn’t going to qualify. Here are some of the problems sellers encounter with FHA loans. Do your best to avoid these issues.
Keep reading, and you’ll see how you can make your home eligible for an FHA mortgage before it becomes a problem.
Selling to an FHA Approved Buyer
While the FHA can be strict about its requirements for homes, the organization is relatively reasonable in what it expects. If you are planning to sell a property, you can most likely meet the requirements with a little effort and investment on your part. There are a few exceptions like a leaking roof or non-function heating system which would be large expenditures.
Ultimately the work will be worth it – giving you access to 30% of the home buyers in today’s market.
Here are some things to consider if you want to sell to FHA buyers:
Fix Serious Problems First
The FHA will not approve a mortgage for a home with severe defects. If you ‘re going to sell to an FHA buyer, you will need to fix major issues like a leaking roof, structural issues, lead paint, mold infestations and other significant problems.
Fixing substantial issues before listing is necessary if you want to get the best price for your home – from an FHA buyer or any other buyer – so you might as well invest if you are interested in attracting the best buyers.
Here is a list of common issues that an appraiser could flag when the buyer is using FHA financing:
From a sellers perspective, it is always smart to make these kind of repairs before selling your house. Not only will you make more money, but you’ll also likely sell your home a lot quicker.
These are things you need to address if you want to make your home eligible for an FHA mortgage.
The FHA sets loan limits based on home prices in different markets. If your home is going to be priced above the loan limit, it is probably not worth your time to prep the property for FHA buyers. Unless they can come up with the difference between the loan maximum and the selling price, they will not be looking at your property.
The FHA limits vary considerably by area. Be sure to check what the limits are in your market before you take further steps to appeal to FHA buyers.
The FHA recalculates their national loan limit on a yearly basis. These limits are based on a percentage calculation of the national conforming loan limit.
For 2017, in expensive areas, the FHA national loan limit “ceiling” will increase to $636,150 from $625,500. FHA will also increase its “floor” to $275,665 from $271,050.
The FHA has set the minimum national loan limit “floor” at 65% of the national conforming loan limit of $424,100. The FHA said the floor applies to those areas where 115% of the median home price is less than 65% of the national conforming loan limit.
Also, the maximum claim amount for FHA-insured Home Equity Conversion Mortgages (HECMs), or reverse mortgages, will increase to $636,150.
You can see the FHA loan limits for Massachusetts in this excellent reference. Use Google, and you can get this information for your state as well.
Do you know how many times I have heard stories where a real estate agent had no clue about FHA loan limits? The answer is far too many! Having a seller accept an offer with an FHA mortgage over the loan limit wastes everyone’s time. It’s called gross negligence.
Yes, Judge Judy also expects a real estate agent to understand FHA mortgage loan limits!
Informing FHA Buyers About Home Inspections
Home inspections are a standards part of the home sales process. The home inspector looks for any problems with the home and submits a report with his or her findings. Most home buyers will want an inspection. However, many buyers are not aware of the fact that a home inspection is different from an appraisal.
When working with FHA buyers, you will need to provide a document that explains the difference between a home inspection and an appraisal.
Another essential thing to keep in mind is that if you decide not to make your home FHA compliant and are selling as is, the buyer should be informed you will not be participating in making any repairs needed to the property.
An FHA Approved Appraiser is Required for the Sale
The FHA will only approve a mortgage if the home is appraised by an appraiser approved by the FHA. No matter how promising another appraisal is, the FHA endorsed appraisal will be used to make the final loan decision.
One crucial thing to note is that an FHA appraisal stays with a home for 120 days. Why is this important? Let’s say someone is buying your home for $300,000 and the appraisal happens to come in at $290,000. The appraisal for $290,000 will remain with your house for four months. You would need to dispute the low appraisal otherwise any buyer coming forward in that four-month window is stuck with the appraised value.
While appraisers are supposed to be impartial, it never hurts to make their jobs easier when you are trying to sell. You can do your best to provide easy access to all areas of the home, including the basement and attic because the appraiser will have to do a full survey of the property to complete his or her appraisal.
You Can Help With Closing Costs
Closing costs can be a big hurdle for FHA buyers, which is why the FHA allows sellers to assist with some of the costs. The FHA will enable sellers to help with up to 6 percent of the sales price of the home to help with closing costs; interest rate buy-downs or discount points.
Of course, you are not obligated to help with closing costs. But it can be useful to close a deal with an FHA buyer. Keep in mind when evaluating an offer on your home it’s your bottom line that matters and nothing else. Here is an example of what I mean:
These two offers are in fact identical. In each case, you net the same amount of money. Over the years, I have seen some sellers lose their mind because of buyers asking for seller concessions. What’s important is your net. Don’t get caught up in the buyer asking for a closing cost credit. Who cares what the buyer asks you to do as long as you meet your objectives? Keep this in mind.
Your goal should be to get to the closing table with a reliable buyer.
FHA Condo Rules
FHA loans for condos carry special rules that you should be aware of if you are selling a condo. Your condo must be approved for FHA-approved mortgages. The list is regularly updated, so you will want to check that your condo is currently approved before you try to get an FHA buyer.
Why is this important? As mentioned previously, a substantial amount of buyers get FHA mortgages because of the loan down payment. If the condo development in which you live is not FHA approved you stand to lose a significant amount of buyers.
The best way to determine if your condo will be approved for an FHA loan is to check the FHA approved list and to talk with your association about eligibility. The association should have information on late membership dues, percentage of FHA insured units and more pertinent information.
Another important note on FHA condo approvals:
The FHA usually will not approve a condo mortgage is there are more than 15% of owners that are late on their association dues. It will also usually not approve a mortgage for a condo where the FHA is insuring 50% or more of the units.
If you find out that you do not meet all of the requirements for an FHA mortgage, you may be able to get a waiver. Sometimes your real estate agent may be able to talk with local lenders and get you a waiver. While it is not guaranteed, it is worth trying if you want to sell to an FHA buyer. It’s always crucial to do your due diligence when buying a condo. These tips will help.
Another Alternative – The FHA 203K Loan
Another option for home buyers when purchasing a property that needs work is a 203K FHA mortgage. The 203K allows a purchaser to roll into the loan specific improvements that need to be made. For example, all of the below items can be moved into the loan.
The cost of the work with a 203K loan must be at least $5000. The 203K mortgage covers the cost of purchase plus the work you will be doing to the property.
Work with An Agent That Understands FHA Loans
One of the easiest ways to make sure you are ready for FHA buyers is to work with a real estate agent that knows the FHA process. An experienced agent will be aware of all the rules and limitations, and can quickly determine if your home is eligible.
If you do need to take steps to prepare for FHA buyers, your agent can guide you through them to minimize your costs and maximize the desirability of your property. And with the right agent, you will attract more than just FHA buyers!
Hopefully, you now understand house to make your home qualify for an FHA mortgage.
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