With foreclosures and short sales in the bullseye, property repairs are a big issue.  Many foreclosed homes are in desperate need of TLC; some appear to have been ground zero of angry evictions.  And many buyers actually want “fixers” where the price might be lower  and they can do some work themselves.  Whatever the cause, the banks have a double standard.  When selling, they don’t want to fix them first, but they also don’t want to finance them either, at least until they’re fixed up a bit.

FHA vs. Conventional Financing

Many people believe that FHA financing will impose tougher repair conditions than will Conventional financing.  This notion is a holdover from the pre-reform days of HUD.  My recent observation is that one isn’t any worse than the other.  The banks are fussy about everything these days, and one cannot safely predict with certainty where the bank will dig in its heals.  Some don’t care about the dishwasher is missing, others want to know what caused the stain in the carpet (true story).   To confirm whether they have expressly different repair standards for FHA vs. Conventional financing, I contacted a number of banks today to ask this question:

“With all of these semi-ratty REO properties for sale, do you see much difference in the way your underwriters address property issues on FHA vs. Conventional loans? I have an “as is” sale with some issues that many would consider cosmetic in nature, while others might consider them more serious.  From my viewpoint, the underwriting responses are unpredictable whether FHA or Conventional.”

Here are seven responses from different banks:

“I don’t see much difference. We are directed by our corp office which is quite strict. All sinks, toilets etc need to be in place even you have 1 fully functional bathroom. All built in appliances need to be in place. If carpet has been pulled but tack strips left then you need to replace the carpet. You can have a hole in a wall, as long as the insulation isn’t oozing out of it. Exposed wiring is an issue. Give you an idea?”

“My experience has been that there is no difference between the two.  It sounds like we are more flexible than most lenders with items that need to be repaired.  Call me case-by-case and I can let you know what we will be able to fund without having done.”

“I echo your thoughts on this. I’ve really not seen any uniformity to draw a fair assessment of what we can realistically try to predict. (How is that for double talk). I’d be interested to hear what you find.”

“Yes case by case that’s why the answers are all over.  If cosmetic in nature, we are trying to go with that on REO’s only.  If things like missing stoves, sometimes we are accepting the paid receipt for the purchase of the stove and let it close to install afterwards.  It really does depend on each transaction.”

“Conventional is easier as we are allowing some holdbacks now.  See attached, this is new.  Watch out for the part about seller paying and us escrowing (actually, we hold the funds) 1.5% x’s and any overage of the actual amount to cure goes back to borrower in the form of principal paydown.  It’s Fannie’s rule and crazy but we’ve confirmed it.  That’s the only sticky part. We don’t do holdbacks on govies.”    

“Fha is more strict then Conventional.  The main issues are health and safety.  Broken windows (not cracked).  Exposed wiring, pool so green you can’t see the bottom etc.   I will ask Lynne her opinion as well.”

“Marc, probably reason that you can’t nail it down is that there are investor overlays. Our investors do not want properties that have to have anything done to them beyond paint, carpet cleaning etc.  Regardless of what fha’s guidelines are, we have to follow the investor overlays.   I guess to answer your question, there is not much difference between fha & conventional in regards to the condition of the property. –Lynne”

So there you have it.  Three say FHA and Conventional are the same.  Two say conventional is easier–one because they do holdbacks again; the other because FHA is theoretically tighter.  A sixth says says “case by case,” in other words no difference.  And the last one–a seasoned underwriter I’ve known for many years–nails it perfectly:  the investors are calling the shots, and what they say goes.   It doesn’t matter what FHA or Conventional guidelines require, the investors who are the ultimate owners of these loans paper do not want ratty properties as collateral.  And they’re the “deciders” now.

Bottom Line?

Don’t turn FHA buyers away or avoid FHA financing because you think a conventional loan will be easier.  But do be cautious when buying a beat up property.  Call your lender to discuss its condition before you write the offer. An ounce of prevention is worth a pound of cure.  And remember that a mortgage banker like me, who can broker your loan to a variety of banks, may be able to find the one who won’t object to your repair issue.

I was quoting rates to an investor client today and had a chance to examine the effects of the new Loan Level Pricing Adjustments announced by Fannie Mae last week.   The client is putting 25% down and has a mid Fico score of 6.72.

The “adjustments” to the published rates included 1.75% for investment property and a 2.0% adjustment for her Fico score.  Now ordinarily, lifting the interest rate will eliminate one point in fee for each quarter point we elevate the rate.   Thus, raising today’s 5.25% 30 year rate to 5.5% would reduce the 3.75 total adjustment to 2.75 points, and so on.

Unfortunately, with the way banks are pricing loans today, that formula is obsolete.  There is a one to one ratio between interest rate and points at the moment, and so this loan will require that the investor pay several points at least for a rate in the 6-7% range.

Ouch!

You know those headline mortgage rates you see advertised?  They are becoming more elusive each week.  While rumors still circulate about the coming of 3 & 4% mortgage rates, don’t bet on it.  More importantly, don’t wait.   Last week’s spate of bad economic reports did little to help rates, and while Freddie Mac’s Primary Mortgage Market Survey yesterday reported a weekly average of 5.11% at .7 points, Freddie also noted the reversal of the recent downward trend.

To further complicate the picture in ways indecipherable to the general public, Fannie Mae and Freddie Mac rolled out new Loan Level Price Adjustments this week.  Refer to by mortgage professionals as “ads” or “hits” (to the rate), these new adjustments harshly penalize investors, home owners seeking cash-out refinances, and anyone with a sub-740 Fico score.

Also, the new High Balance Conforming loans–those lying between $417k and $475k–have even harsher adjustments.  So while these “jumbo conforming” loans offer rates much lower than the regular jumbo loans, they have guidelines that are squeaky tight when compared to sub- $417k conforming loans.

Get pre-approved well in advance of writing an offer so that you know the water temp before you dive in.  And if you’re refinancing, have us do some homework to make the equity is there to complete the loan before you spend money on the appraisal.