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Last week I met with a couple who are buying a home in New Jersey with 10% down and less-than-perfect credit. The first thing we did was secure an approval for a conventional Fannie Mae 30-year fixed rate loan with traditional PMI. Then we looked at how FHA financing would compare to what we already had. The FHA rate was lower by .75% and the monthly mortgage insurance premium was $200 less. Even with the upfront mortgage insurance (added to the loan amount), the monthly payment savings were too significant to ignore.
They/we/us reviewed both options and decided the FHA option was the black-and-white better choice. Here is the best part; they applied and got a commitment in 7 days with the completed appraisal (which came in with a value greater than the purchase price and no nit-picky repairs or conditions).
That’s about as good as it gets.
But tell a Realtor or a seller that a prospective buyer is making a generous offer on a house and using an FHA mortgage and watch their smiles fade. There is a tired old stigma that equates FHA mortgage financing with appraisal and approval difficulties. Nit-picky minor repairs that the seller has to fix before closing, additional disclosures to protect the buyers that everybody has to sign and an indiscriminant, general sense that an additional layer of difficulty hangs over the approval process still persists.
This is a well-earned reputation that decades of FHA mortgage experiences have created and perpetuated. I once actually had to have a seller paint the hand rail on the stairs leading to the back door of his home. The hand rail did not need to be repaired, the stairs were intact and there was no safety issue. The paint on the hand rail was old and faded and falling off in some spots. The seller had to sand and paint the hand rail and then the appraiser had to go back out to the house and inspect that the work was done. I kid you not. Oh, and the buyer had to pony up another $75 at closing to cover the final inspection. The buyer had every intention of sanding and painting the railing after the closing.
FHA loans are government insured (actually they are borrower insured because the borrower pays the insurance premiums), because they tolerate less than perfect borrower profiles. They allow for smaller down payments, as little as 3.5% in fact. They are more forgiving with credit issues and asset sourcing, even debt-to-income challenges. FHA mortgage financing does business with less-than-perfect buyers and sellers tend to prefer those perfect, nothing-can-go-wrong buyers.
So I get that the stigma grew out of a well-earned reputation and that the real estate universe may cringe at the sight of an FHA mortgage offer. I mean, why wouldn’t a seller or a Realtor balk at a FHA buyer with all those dents and scratches?
Well guess what?
FHA mortgage financing has changed just like everything else!
We used to use the telephone to call people and have actual conversations, now we have “smart” communication devices to text, e-mail, surf the web and communicate in every way except talking. Everything has changed, there are now hundreds of channels on my TV, more than I could ever watch, nobody smokes anymore and McDonald’s sells breakfast all day!
The old FHA business model with all of its risk averse ifs, ands and buts was forcing prospective borrowers to find ways to secure conventional Fannie Mae and Freddie Mac loans. They were losing business to the competition they had for so long taken for granted. This caused all sorts of issues not the least of which was the overall impact on the housing markets, underutilized and often perceived as too difficult to pursue, homebuyers sat on the sidelines or looked elsewhere for mortgage money.
Enter smart FHA management people who set about polishing up that rusty old business model. Common sense and mortgage finance rarely occupy the same sentence harmoniously but FHA mortgage getting began to be less of an obstacle course. The rise of QM (Qualified Mortgage) and ATR (Ability-To-Repay) leveled the playing field with Fannie and Freddie and suddenly FHA mortgage getting was almost the same.
Those buyer protecting disclosures are still around but the nit-picky overall sense of added difficulty has faded. The mortgage insurance premiums are still pricey and HUD does not have a consistent strategy for managing the Mutual Mortgage Insurance Fund that insures lenders for loans that go bad. This is an issue that needs to be sorted out before FHA mortgage lending can really compete in the big leagues. Right now FHA mortgage insurance is more expensive than traditional PMI and it is forever, a one-two punch that may be keeping some borrowers from signing on.
But as far as the mechanics go, FHA mortgage getting is no more of an adventure than conventional Fannie or Freddie or any other lending platform. Things have changed in the FHA mortgage financing space, speedy approvals and unremarkable appraisals make FHA mortgage financing a contender.