Selling to FHA buyer?

Question

Currently I have a rehabbed property that I am trying to sell.  It has been on the market for <3 days and the offers are rolling in like crazy.  All offers that have come in have been FHA loans.

I am trying to decide if I should wait for cash buyer or a conventional loan.  I have been reading about the FHA appraisals and hear they can be tough as well as hold you up for at least a couple of months.

I would love to hear from anyone who has had any experience selling to an FHA loan and how difficult/long the process took?

Thanks

J Scott · Answer

As others have said, FHA isn't that tough if you know what you are doing.  Here are some things to keep in mind:

1.  If you've held the property for less than 90 days, you'll need to verify that the lender's underwriter will approve the financing.  FHA used to have a rule that they wouldn't finance flips held less than 90 days.  While they did away with this rule back in 2010, there are still many lenders who still won't do FHA loans if you haven't held the property for at least 90 days.  So, if that's the case, make sure you talk to the lender and get verification from the underwriter that your buyer will be able to get their loan.

2.  If you've held the property for less than 180 days (1 year in some cases), expect that your buyer's lender will need to get two appraisals, and you'll likely have to justify the increase in price from when you bought it.  That's generally done by providing the appraiser or underwriter a list of repairs/renovations you've completed, and in some cases, copy of receipts/invoices.

3.  If any FHA appraisals come in below the contract price, that appraised value will be the maximum that FHA will lend against for the transaction.  Additionally, the lowest FHA appraisal will stay with the property for 6 months, so if an appraisal comes in low, that's the most FHA will lend against that property for the next 6 months.

4.  The underwriter will require an inspection by an FHA-approved inspector (the buyer's inspector will likely be FHA approved).  Any safety issues or issues that make the house anything less than move-in-ready will be flagged and will need to be fixed before the loan is approved.  Your example above about the broken window *may* be something that is required to be fixed prior to funding of the loan.  Here is more on that:

http://www.biggerpockets.com/renewsblog/2010/04/25/fha-property-inspection-checklist/

5.  If the lender or underwriter isn't familiar with the FHA rules surrounding a flip, the process can take a lot longer than necessary.  In general, an FHA loan should be able to be funded within 3 weeks if you have a good lender, broker and underwriter.  But, if the broker doesn't know to order the second appraisal, if the seller doesn't know to make the appropriate repairs, if the underwriter doesn't get a copy of the repairs, etc., the whole process can be held up for weeks/months.   This is why you need to verify that the broker knows the process and has done these before.

6.  I prefer to have all my buyers who plan to get FHA loans use MY mortgage broker.  I know my broker knows the rules, I know my broker can get the loan funded (3-4 weeks, typically), and I know that my broker has dealt with all the FHA details many times in the past.  If the buyer won't use my broker, I will *grill* his chosen broker, and if I have any doubts that his broker can get it done, I won't accept the contract.

Account Closed · Answer

Dell Schlabach

Thanks for your response.  I have read a few articles that mentioned if the house gets flagged for any reason, like the ones you listed above, the loan will not pass and the inspector will come back after it is fixed.  Im sure this can delay the process a month or so.   A first time sale to an FHA loan seems like it would be quite the learning experience.

Account Closed · Answer

Wayne Brooks
Wayne-You mentioned structural/safety Issues. What all would fall under this category? Would something as simple as a cracked window make the house unable to sell or would this have to be corrected by the seller? Also, how strict do the FHA Inspectors/Appraisers get when they come look at the property?

Thanks

Wayne Brooks · Answer

The comments above are correct, and good. Fha looks at mostly health and safety issues.  Yes a broken window has to be fixed.  They look for things like trip hazards (uneven edges where tile meet linoleum, needs a threshhold), all electrical outlests must work, etc.  Also no rotten wood.  If appliances are there, they must work.  Reinspection in usually a day or two.

Dell Schlabach · Answer

If the appraiser is out at the property say, week two, you get the repair done in a day or two, call right away, and they will typically be back in a few days to a week. No need for delay in closing.

Dell Schlabach · Answer

A cracked window will be flagged, loose flaking paint anywhere will be flagged, missing rails on any stairways inside and out will get flagged. These are the ones that come to mind that we ran into in the beginning, now its on our punchout list to check and make sure its done before we put the house on the market.

Dell Schlabach · Answer

Approximately 80% of the homes we sell are gvt backed, fha, va, rural development etc. Of those about 80% are FHA.

If you get a good lender, they can close an fha in four weeks. But typical is more like six weeks for us.

We have not had any trouble getting appraisals to come in during the last year, and most of ours are under contract significantly under six month, may under three month, requiring two appraisals.

For me Ill take a solid fha buyer anytime.

Wayne Brooks · Answer

The FHA process is really no longer than conventional.  If you don't have any structural/safety issues, it shouldn't matter.  You'll want to verify any preapprovals, that they required tax returns to submitted, not just W-2's.  For FHA, request a copy of the DU (desk underwriter program) report from the loan officer who preapproved them.

Selling to FHA buyer?

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