The toughest challenge by buyers' agents in Sonoma County now is getting an accepted purchase offer in the below $300k price range. Many of the new buyers encouraged by the current low affordability index are first time home buyers using FHA financing. Making a strong FHA purchase offer will give your client the best chance in getting into escrow. We know from experience, your first time home buyers are up against all-cash offers and larger downpayments than the FHA 3.5% minimum. So the FHA offer needs to be as strong as you can make it.
An FHA financed offer used to be something sellers were wary of. In the past, FHA required sellers to pay for some of the transaction costs. FHA also used to be very strident about the condition of the home. And FHA used to take longer to close than conventional financing. In the past 3 years, FHA has gotten much easier to use as buyer financing. There is no requirement of seller payment of closing costs and no pest-report requirement as long as it is not cited in the contract or recommended by the appraisal due to obvious infestation. An FHA purchase transaction can now close in less than 30 days. This government insured financing has been the easy-to-use workhorse of new buyer financing throughout our credit crisis. And FHA comes with some very good features for a borrower like the low downpayment, no rate hike for lower credit scores, and reasonable mortgage insurance. Once a borrower has an FHA loan they can refi easily, often without appraisal or income qualification. And FHA loans are assumable, a feature that may be valuable 3 years from now when market rates are much higher than they have been in the past 2 years.
But as great as FHA loans are, they still are a hard sell to a seller fielding multiple offers. There are 5 factors that go into making a strong FHA purchase offer.
- Offer price
- Preapproval letter
- DU approval
- Proof of funds
- 2nd approval request
Offer Price
If a typical homeowner seller was comparing a cash offer with a higher offer using FHA financing, chances are they will take the FHA offer provided the preapproval is strong and the home has no physical issues that may preclude FHA financing (like obvious pest issues or structural damage). But the majority of sellers in Sonoma County now are banks and asset management companies. Taking a cash offer over a financed offer allows the bank to avoid any required repairs on these often debilitated properties. Cash offers also eliminate the chance that the financing will be an impediment to sale during the escrow process. In light of these considerations, the bank will often accept a cash offer even if it is as much as 10% lower than a financed offer.
The FHA offer must be limited to what the house can reasonable appraise for using a HUD certified appraiser. Sometimes now, the sale price is above the appraised value. This is occurring in often Sonoma County as multiple offers on limited inventory drive up the price without any historic comparables to support the higher price in an appraisal. If the appraised value is lower than offer price, either the buyer has to come in with the difference, or the price be negotiated down, or both. So the offer price needs to be strong to go up against competing offers, but not so high that there is no chance of appraised value coming close to offer price.
Preapproval Letter
To provide a strong preapproval letter with your offer, the letter needs to state clearly that it is a preapproval, as opposed to a prequalification. The letter should state the nature of the financing being FHA, approved to specific guidelines and up to a specific rate. When using a mortgage broker instead of a large lending bank, the broker can specify which investing lender the loan will be going to. This gives a recognizable name to the seller, whereas often, they hadn't ever heard of the mortgage broker. For example, I am a broker with First Priority Financial. My preapproval letter on my letterhead can state
"This financing utilizes FHA insured financing underwritten to HUD and CitiBank guidelines."
DU Approval
Desktop Underwriting (DU) is the automated underwriting system (AUS) utilized by the entire lending industry. Fannie Mae, Freddie Mac and FHA all have their guidelines in this software allowing a loan application to be entered and run for automated approval. This is the basis of a solid preapproval. By getting an "Approved/Eligible" finding on a borrower, the report indicates that this loan can be underwritten by a lender provided all information is accurate and the property itself meets title and appraisal requirements.
Attaching the DU findings detailing the Approve/Eligible status of the borrower allows the seller to see that the preapproval process is thorough and above board, making a strong offer. The findings do not reveal personal information like social security numbers or bank accounts numbers for security purposes.
Proof of Funds
Providing "proof of funds" with the offer is a requirment of some selling banks. Proof of funds consists of recent bank, retirement and investment statements (with account numbers whited out for security) showing the buyers ability to come in with down payment. Providing proof of funds makes a strong FHA offer if provided upfront.
2nd Approval Request
Common today in Sonoma County is the seller's request through the listing agent that your offer be qualified by getting a 2nd preapproval by a lender of the listing agent's choice. This confirms for the seller that buyer's financing is solid. The buyer's loan agent can expedite the process by contacting the 2nd lender directly and forwarding the required documents for the 2nd lender to do a quick preapproval to complete the offer.
When this process first began, there was a fear that the 2nd lender would try to 'steal' the buyer as a loan client. I very rarely see this happening these days. Occasionally a less scrupulous loan agent who as been assigned as 2nd approval lender will hammer the buyer to try to get them as a client in the deal, sometime misleading the buyer about the 2nd lender's ability to influence the acceptance of the offer. Luckily I don't see much of this in Sonoma County. The 2nd lender agents of the highest production listing agents for REO are professional, prompt and move the offer process along quickly for all parties.
The buyer's loan agent needs to be accessible; ready to participate and expedite these requests for 2nd approval. Each 2nd approval lender asks for different documents for the process. Often they want to see a formal application, credit report, income documentation and proof of funds. If this part of the process is holding up your buyer's offer being reviewed, you need to work with a responsive buyer's lender to make sure the process doesn't get bogged down with unreturned phone calls.
How a buyer's agent puts together their client's offer makes a difference. Making a strong FHA purchase offer in Sonoma County will give your client the best chance at an accepted approval in a challenging buyers market.
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