FHA Flexibility May Not Be Worth the Time!!!


You have to love the amount of flexibility there is when running a deal FHA but more often than not, there are too many things left undone that cause major hiccups in the final stages of any transaction.

fhalogo.gifTechnically, many of these hiccups are because of the lack of attention to detail on the part of the mortgage broker handling the file. But for the sake of this post, we will say that it isn’t anyone’s fault why so many FHA processed files couldn’t beat a broken bottle of molasses running uphill to the closing table. I have an associate who wants to purchase a 3-unit apartment building in Washington, DC but he has had no success getting the deal to the table. Let’s call him Investeron.

You would “think” that anyone with 3 bureau scores over 720 and a $100,000/year income is a shoe-in for financing for anything under $500,000. Mais, ce n’est pas vrai.

Problem #1 – If this property is going to be 100% investment than Investoron would have to find 20% for a down payment. That is bad news. It just so happened that Investoron is willing to live in one of the units as a joint-tenancy occupant. Problem solved.

Problem #2 -The decision was made to run the deal FHA. With FHA there is a required 3% down on a multi-unit.
No worries. Investoron finds an able friend to provide her with a gift. We know that gifts must come from family members, so Investoron asks his father for the funds. His father agrees, the gift letter is completed, the monthly statements are submitted and all is well. Problem solved. (2 weeks)

Problem #3 – FHA changes their guidelines and gifts cannot be accepted as “seasoned funds” for multi-unit purchases.
The gift must then be returned. The only option at this point is to have Investoron’s father add Investoron to his checking account or whichever account has an average balance of the 3% or more. He agrees and all is done. Problem solved. (1 week and an additional week to receive the VOD from Inverstoron’s new banking center)

Problem #4 – The appraisal was ordered within the first 3 days of the application process for this purchase. The hold was that the initial appraisal was not ordered as an FHA appraisal. Problem solved. The appraisal was canceled an re-ordered but did not happen for another 5 weeks. That appraisal was submitted in a timely fashion and all was well. Problem solved. (6 weeks)

Problem #5 – The appraisal that came in was not done in accordance with FHA’s regulations. PLUS, no FHA case number had been filed. YIKES! (1 week)

Problem #6 – Investeron is an investor and he uses a standard investor 2 page purchase of real estate agreement. Processor calls Investeron and asks for the signed contract and the FHA addendums. Investoron has no FHA addendums and calls the broker. The broker alerts Investoron that the contract must drawn up on a standard GCAAR with FHA addendums and signed by seller and buyer. “It’s just the way things have to be done with FHA.” (2 weeks)

As of today, everything is in and Investoron and the seller are waiting for a clear to close and what has been a roller coaster of a transaction. And it really goes to show us investors that sometimes great credit can’t get the job done if the rules and the path are not simply paved in front of us with no surprises in the bushes. I hope all is better in your real estate investing business.

Blessings to your real estate investing successes,

Milton B. Yates

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  1. Wow. I’m glad that I didn’t have those types of troubles when I used an FHA mortgage. I’d like to say that my loan process was actually very smooth. Of course, I was doing a very typical single family residence and had enough for the 3% down payment already sitting in a savings account. The only hiccup was that when my wife’s grandparents gave us a sizable gift shortly prior to closing it threw up a red flag and we were required to provide documentation that the money was a gift and was from a family member. I’m not sure why, because this money was used for purposes outside the immediate real estate transaction (upgrades and improvements for the home via a contractor). So other than getting a gift letter for unrelated funds (which took all of 24 hours to sort out) it was a very smooth transaction.

  2. Thomas Johnson on

    We need to get fluent in FHA. Going forward at least for 2008, that is going to be where the action is. In ERAHouston, the 271,000 limit is well over average sales price, so we can find move up buyers solid values with great loans. IF you think rates are going up in the future, the best service you can give a buyer is to let them go forward with an assumable loan. If rates rise, they will have the most sellable home on the street. You can’t put a value on having a 6% assumable loan in a 12% market. Well, you can it’s just a little math.

  3. Too many loan officers are trying to use FHA now that subprime is dead and Fanie/Freddie have tightened.
    The loan officer who were doing FHA when FHA wasn’t cool would have been just fine on a deal like this.

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