fha-home-buyer-woes2Being an FHA home buyer in Silicon Valley is a challenge right now, especially if you want what everyone else wants: a nicely updated and remodeled home in a good area with no “issues”.  (Issues meaning things like high voltage lines, busy roads, flood plains, or being too close to stores or spots not everyone wants to be near.)

How many FHA buyers are successful in purchasing a house right now?  The percentages are very small.  Just now I ran the MLS for sales of single family homes (houses and duet homes) in San Jose over the last 30 days.  Here are the figures:

All closed sales = 368

What kind of financing was used for these 386 closed sales?

Conventional financing = 268
All cash purchases = 77
FHA purchases = 10
Conventional 1st & 2nd loans = 6
VA Loan = 1
Owner financing = 0

The odds of success for FHA buyers is less than 3%.  Why is it so tough?  Condos are even more challenging than houses, so let’s look at those issues first.

The Problem with Condominiums and FHA

I need to start by explaining that things aren’t always the way they look.  We tend to think of condos as looking like apartments, with no yard, for example.  We think of townhomes as a two story or more home with neighbors on the sides but no one above or below.  And we think of houses as freestanding buildings with a yard around it.

That’s really how things look.  But how these different types of homes are owned may be another thing altogether.  For FHA home buyer purposes, this makes a huge difference.

Some townhouses and even some houses are not owned the way they look, but are held in condo ownership.   A good example of this is The Villas of Almaden, a beautiful &  gated community at Meridian and Coleman in San Jose’s Almaden Valley. Structurally, many of the buildings are houses – but they are “condo ownership” and are stored under the condo label in our local MLS. What makes these buildings be condos? Practically speaking, in addition to their own space for their particular unit, the owners also own a percentage of everything else, such as the pool, grassy areas, tennis courts, private roads, etc. They also have a share of the liabilities of the condo community, too.

If you are an FHA buyer and you want a San Jose area condo (or any home which is held in condo type ownership), you have to make sure the complex is FHA approved. We had the option of getting individual units spot checked until February 1st, but that has now been eliminated. Getting an entire complex approved takes time, perhaps 60 days, and money – and most buyers don’t want or cannot take on that kind of financial liability (and most sellers don’t want it either). Here is the link for the HUD site which will list for you the condo communities which are FHA approved.   So it is important to know if the townhouse you’re looking at is owned like a townhouse or owned like a condominium.  It can be painfully disappointing to think that a home can be bought with FHA backed financing, only to later discover that it can’t due to the type of ownership and lack of approval of the association.

Houses Are Simpler, But Not Always Easier for FHA Buyers

If your heart’s desire is to purchase a house in Silicon Valley, or a townhouse (not held in condo ownership) or PUD (planned unit development), at least you don’t have to get the entire neighborhood’s approval, so that one hurdle is cleared.  What you will find, though, is that there is a lot of fear by listing agents, and thus by their seller clients, about taking on an FHA buyer.

With multiple offers, the one(s) with FHA backed financing are usually the first ones eliminated.  (It’s not just due to the FHA, but also due to the fact that usually FHA buyers have very little cash down.  We are finding a lot of appraisal challenges because prices are rising fast.  With more cash down, an appraisal problem is less of an issue.)

Sometimes even with single offers, though, FHA buyers are running into trouble.   In some cases, the MLS will instruct agents, “No FHA Offers“.  In a few of those, it continues, “home cannot pass FHA guidelines” or otherwise indicating that the property needs too many repairs to get past the FHA requirements.  In others, though, the listing agent isn’t so direct and either won’t say that FHA offers will be rejected or simply behaves badly because he or she doesn’t want to work with one.   This is frustrating but is part of the challenge we are finding today.

The Stigmatized FHA Offer

Why are FHA offers viewed so dimly?

  • usually there’s very little cash down payment (hence, if the home does not appraise, it will be a big problem)
  • the FHA requires the home’s condition to meet certain standards & if the home needs work, the deal may not close
  • FHA backed loans usually take longer to be fully approved and to close
  • overall, there simply appears to be much more risk to the seller that the transaction will fall through or need to be renegotiated

There’s quite a bit of variation among FHA offers  in term of the amount of cash involved.   I have seen FHA buyers have down payments ranging anywhere from 3% to 20% down (some have offered less down and then asked for the sellers to credit them back that amount, trying to do a 100% financed deal).  Why would anyone with 20% down do an FHA backed loan? Because the parameters are less stringent than conventional loans.  So the FHA opportunity is one which can appeal to a lot of buyers who otherwise would not qualify for a conventional loan.    So one mistake that I see with listing agents and sellers is not appreciating that this variation exists among FHA buyers.  They are actually not all the same!  The super small down payments significantly hurt FHA buyers’ odds of having their offer accepted.  The larger the down, the better your chances are that the seller will be comfortable with your contract.

A huge plus with FHA is that the down payment can be gifted, partially or in full.  If you are an FHA homebuyer in Santa Clara County and your relatives want to assist you with the down payment, you’re in luck!  It’s easy to factor that in, and easy to improve your position if you can up your down payment amount that way.

There’s also a lot of variation among the lenders working with FHA home buyers.  Some lenders say that FHA borrowers need 21 days for a loan contingency and 45 days to close.  One Los Gatos mortgage broker says she can do it in 21 days.    The new guidelines for the Good Faith Estimate is slowing everyone down – the question is, how slow does it need to be? The GFE has to be done before an appraisal is even ordered.  That alone stalls things by about 3 more days than before these new guidelines were in place.  The really long time frames do hurt FHA home buyers chances.  If it’s possible to work with an FHA lender who can perform more quickly, it will greatly help the stigma of the FHA offer.

Right now it’s a seller’s market in much of Silicon Valley, which means that it’s hard for buyers to buy in general.  Add to that FHA backed financing and it’s tougher still.  But don’t give up if you’re a buyer & don’t assume the worst if you’re a seller!  FHA buyers are very anxious to get into a home, and their motivation is probably the most important element of all in terms of the likelihood of having a successful close.