1st Time Homebuyers, Blog

Roadblock to FHA financing

First time home buyers (together with investors), are a major force behind the recent increase in sales in the San Fernando Valley. With FHA financing, first time home buyers can theoretically buy with as little as 3.5% down, and help themselves to the juicy government incentive/tax credit of up to $8,000 (at least, until Dec. 1, unless there is a change in the law in the meantime).

Not so fast. Unfortunately, because so many of the affordable properties are attracting multiple offers and bidding wars, many agents in Los Angeles feel that making an offer on an REO or a short sale with FHA financing is unfortunately pretty much guaranteed to end up in the dust bin. Sometimes the anti-FHA bias is even explicit, as the National Mortgage News noted, “[t]housands of properties listed for sale on various Multiple Listing Services around the country say simply: ‘No FHA’ under the description of acceptable financing, lenders and mortgage brokers say.”

So why is there such a discrimination against FHA financing? The answer is pretty simple. As Raffi Tal, the chief operating officer at IShortSale Inc. in Woodland Hills, Calif., was quoted in the same article, “[w]hen a property goes to REO, the lender is really discounting the price, and if the buyer has an FHA loan, it takes longer, so that’s why they’re discriminating,” he said. “The guidelines on FHA are tougher, and if they get multiple offers they don’t need FHA.”

One of the main concerns invoked by the industry is the perception that due to FHA stricter guidelines, escrow takes longer (60 days instead of 45 days) and might not even go through at the very end. Additionally, the “FHA” buyer often thought to lack sufficient closing costs.

FHA buyers are not the only ones feeling left out in the cold. Even our veterans who want to use VA financing (up to 100%) are in an even worse position bargaining against a cash buyer. Again, the perception is — rightly or wrongly — that a buyer with no/little skin in the game is more likely to flake out before closing.

The answer for one of my buyers, who was sick and tired of being outbid by conventional or all cash offers, was to buy through an auction, where the playing field was leveled somewhat. He ended up with the property he wanted, and only 3.5% down. (I know this because I represented him at the auction.) Not many people can say that these days.