After the mortgage meltdown, private lenders had virtually vanished leaving only government backed home loans as the primary option for low down payment borrowers. As a result, FHA loans became the primary option for lenders looking to Target first time homebuyers. Although the FHA loan product has it’s advantages, the property condition requirements have become the number one cause for closing delays.
It is always a good idea to research the condition of a property before investing thousands of dollars however, FHA has guidelines that many feel go too far.
One example of these requirements is the “no chipped paint” rule. In the event a property has exterior chipped paint, a property may not meet FHA requirements. Of course chipped paint can be an issue but very few clients are incapable of using a paint brush.
So what if the property has chipped paint? In most instances the bank would require the home to be scraped and painted then require an additional appraisal to verify the repairs are complete. This costs time, money, and frustration. As you can imagine this can delay a closing for months in some cases. The result of this is that many loan officers have turned to conventional loans as a better option. Unfortunately, a conventional loan requires a larger down payment that some clients may not have available. In too many cases, clients have shared stories of “other” banks recommending they withdraw money from their 401k or some other nest egg. This, in my opinion, is never a good idea outside of emergency needs. So how do we fix this issue without putting a client in a less than favorable position?
After some light research and planning we have implemented a process to solve this problem. Please note this is based on Clinton County, NY standards as closing costs can vary in different areas.
Fannie Mae offers a loan with as little as 3% down. Less than FHA requires,however, they only allow for three percent seller concessions. This is a complex way of saying, this is the amount of the closing costs that can be financed. With the 3% concessions vs 6% (FHA’s seller concessions limit) a client would still need upwards of $8,000 to purchase a $150,000 home. I feel clients should have this amount available but opinions aside, this is not always the case. A compliant way around the lower seller concessions is a simple adjustment to a sales contract that would reduce closing costs rather than finance them.
Remove Proration of Taxes
Proration of taxes are taxes paid back to the seller at closing that they have already paid for the year. But this means the seller would receive less money? Not necessarily. A purchase agreement for $100,000 with proration of taxes and a contract for $103,000 with no proration of taxes would net the seller the same amount of money. Yes the sales price is higher but it is also a larger loan amount if you were to finance closing costs. (A common practice in Clinton County – per realquest 37% of all Clinton County transactions include seller concessions)
So now that we have removed the proration of taxes, the allowable 3% seller concessions will cover most of the closing costs with a final amount out of pocket identical to that of an FHA mortgage with 3.5% down. And more importantly, you no longer need to be concerned with cosmetic property issues that FHA would typically require to be repaired. With a little extra due diligence on the front end of writing a sales contract, Clinton County real estate transactions will close faster. Typically, we are closing a 3% down conventional loan vs 60 days for an FHA closing.
Give us a call to learn about other unique solutions to your buyer’s needs and remember, prorations are not required. They may be customary, but not required. A real estate professional is the first source for professional thought on structuring a transaction. Avoid lenders that recommend they use retirement savings as a down payment. Although the bank may not calculate the payment in the debt ratio, they will be paying it back. And should they choose not to? Tax penalties will apply.
Bank of England Mortgage