Attention New York Attorneys: FHA Mortgages are Not the Enemy

Real Estate Broker/Owner with J. Philip Faranda (J. Philip R.E. LLC) Westchester County NY License # 49FA1074963

Westchester County Real EstateLike anyone else, I love it when I get a cash offer on one of my listings. That is rare, but it is also nice when we get an offer that has terms including a healthy 20-30% or larger down payment. That doesn't happen all the time either. What is keeping the lights on in Westchester real estate is the FHA mortgage, which was unheard of 5 years ago, but is now more common than any other program for starter and medium homes. 

The minimum down payment on an FHA loan is 3.5%. For the math-challenged, that means the buyer will be financing 96.5% of their purchase. In a county where FHA loans were once as rare as hens' teeth, this causes some consternation among some attorneys who have grown accustomed to picking the low hanging fruit for decades. I always shake my head when we have a perfectly good offer torpedoed by the seller's attorney simply because they have never closed an FHA loan. Here are some of the stupid things these lawyers say:

  • How can these people qualify for a loan if they are only putting 3.5% down? 
  • I can't let us get tied up under contract with buyers with no money. 
  • I won't send contracts to anyone putting less than 20% down. It is irresponsible to get in bed with such a risky loan. 
In the earlier part of the 2000s, the maximum FHA loan limit was a scant $240,000 when the median county sale price was twice that amount or more. At one point they raised it to $340,000, but by then the median price in Westchester was over $700,000. FHA mortgages were therefore, as I have said, very rare. But worse than that, their unavailability created a vacuum that the market filled with sub prime loans, piggy back second mortgages, and numerous other exotic, unstable financial houses of cards. The rest is history. 
After the meltdown, the FHA loan limit was raised up to $729,500 to get things going again. Instead of creating a void, FHA was now filling the void left by overcautious lenders who wouldn't fork over money without a barrel pointed at them by a guy in a ski mask. While the market didn't rebound enormously, money was circulating. Earlier this year, the FHA loan limit was scaled back to $625,500, but lawmakers recently voted it back to $729,500. However, the point was that the program was relevant to Westchester home buyers seeking a solid financing options that didn't require a 20% down payment. 
But it is that down payment that a small minority of lawyers here cannot seem to get their mind around. Buyers who qualify for an FHA loan are every bit as likely to close as buyers who qualify for a conventional mortgage with 20% down. There is no difference, especially when the seller is paid at closing. They are still getting their money. Read that again. Shout it from the mountain tops. It is the truth. 
I say that as a former loan officer and as a broker who has probably closed over 100 FHA transactions. Attorneys who do not understand the FHA down payment rules and view the lower downpayment as "risky" not only do their clients no service, they are exposing themselves as being uneducated about the real estate market in 2011. FHA is now part of the Westchester real estate landscape. If you are an attorney and that is news to you, get educated and serve your clients better. 

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Sonja Patterson
Keller Williams - BV - College Station, TX
Texas Monthly 5-Star Realtor Recipient for the Hou

J Philip-- I used to think like those lawyers--that people MUST have more skin in the game. However, we currently have a large home in our subdivision going to foreclosure --and the owners had put 20% down when they bought a few years back.  A divorce situation. So there really are NO guarantees are there?

Nov 16, 2011 03:49 PM #1
Mary Macy
Top Agents Atlanta Metro - Roswell, GA
Top Agents Atlanta Metro

Good advice, we need to have FHA loans to help responsible buyers buy homes.

Nov 16, 2011 03:49 PM #2
Eileen Hsu
Douglas Elliman Real Estate - Manhattan, NY

Oh Phil, there has not been much of FHA approved buildings in Manhattan yet, but I imagine when there are some FHA condo buildings, the attorneys may have some objections to this too.

Nov 16, 2011 03:53 PM #3
Christine Hooks
Pino Agency - Pennsville, NJ
Celebrating 25 Years in Real Estate!

FHA loans are a huge part of our market down here in South Jersey.  If we didn't accept these offers, we would probably have 50-75% fewer transactions.

Nov 16, 2011 04:03 PM #4
David Shamansky
US Mortgages - David Shamansky - Highlands Ranch, CO
Creative, Aggressive & 560 FICO - OK, Colorado Mtg

I see great qualified buyers (credit and income) all the time that have no choice but for FHA and the modest down payment required. If everyone had to put 20% down to qualify then investors would be raking in the dough as there would literally be droves of empty unsolds to make this market look like childs play.

FHA is helping get out of the mess but we need privateers as well so everything is not solely on the feds therein lies the problem

Nov 16, 2011 04:36 PM #5
Jane Peters
Home Jane Realty - Los Angeles, CA
Los Angeles real estate concierge services

FHA loans are quite commone here but, unfortunately, not for condo buildings.  Trying to find an FHA-approved condo building here is like looking for a needle in a haystack.  But these a great loans, and as you say, they will close and the seller will get his or her money like any other conventional loan.

Nov 16, 2011 04:50 PM #6
Jack Mossman - The Nines Team at Keller Williams in Lodi
The Nines Team at Keller Williams in Lodi - Lodi, CA
The Nines Team in Lodi

Phil - I agree with you that these are the loans of the moment.  However, some of the restrictions regarding "credits" and occupancy ratios in Planned Unit Developments prevents "homeowners" from buying, and provide an opportunity for investors rather than owner occupied (see Jane's comment above.)  Perhaps your "attorneys" could be challenged to rail against some of the real FHA inequities, rather than blather about imagined ones.

Nov 16, 2011 05:05 PM #7
Ed Gillespie
WealthWise Mortgage Planning, a Division of American Pacific Mortgage Corporation NMLS #1850 - Folsom, CA

Wonderful post!  And dead on!  Having done both conventional and FHA in this market, I can agree that there is no reason for anyone on the seller's side to balk at a transaction just because the buyer wants to use FHA financing.  

We had similar push back from sellers and their agents here a few years ago.  Over time it has dissipated as agents saw successful FHA closings.  I hope that will soon be the case in your market as well.  suggest

Nov 16, 2011 07:17 PM #8
Cal Yoder
Keller Williams Elite - Lititz, PA
Homes For Sale in Lancaster PA - 717.413.0744

Phil, it is amazing how people react to "new things." The difficulty of your job is you now need to become an educator and help some folks, including attorneys, understand what an FHA mortgage is. Good luck.


Nov 16, 2011 08:27 PM #9
Anne M. Costello
Weidel Realtors - Yardley, PA

Phil: Pardon me for asking, but isn't it a real estate attorney's job to be knowledgeable about their market and the loan products? Refusing to work with an FHA buyer could be very detrimental to their client - the seller. FHA loans account for at least 60-75% of our trnasactions and have for the last couple of years.

Nov 16, 2011 08:40 PM #10
Dagny Eason
Dagny's Real Estate - Wilton, CT
Fairfield County CT, CDPE Homes For Sale and Condo

Phil,   I have never run into an attorney who didn't explain FHA and CHFA beautifully to their clients, but as you say, they do exist.

Nov 17, 2011 12:06 AM #11
Dave Halpern
Keller Williams Realty Louisville East (502) 664-7827 - Louisville, KY
Louisville Short Sale Expert

"rare as hens' teeth"

good one. never heard that before

Nov 22, 2011 02:56 PM #12
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