FHA Misconceptions - Listing Agents, Read This
FHA loans are not the bad guy! Here John Meussner covers the myths and the realities of this mortgage program.
Another loan program I really hate to hear sellers or their agents put down... the VA loan. VA loans are great - no down payment, no required mortgage insurance.
Most importantly, the VA loan program is an earned benefit for people who have served this country.
FHA Misconceptions - Listing Agents, Read This
FICO score? Doesn't matter. Debt to income ratio? Nope, doesn't matter, either. Have documents been analyzed? Has a thorough pre-approval complete with analysis of income, assets, and automated underwriting been completed? NOW we're on to something.
Real estate agents. You are not a lender. I repeat. YOU ARE NOT A LENDER. Working in a state where you can be a Realtor & a lender? Chances are you're not a very good lender, at least not for complicated scenarios that require extensive knowledge of guidelines. The inspiration for this post comes as I've had a few FHA buyers recently encounter trouble because they are using FHA financing rather than conventional, and listing agents seem to take issue with FHA.
I was told today that "if they have high credit scores that makes a huge difference, but if their scores are 640 or something, I have no interest in working with them". Really? Because I can close a 640 FICO score with a 49.99 debt/income ratio in 2 weeks or less, with no hassle from agents, buyers, or anyone else.
MYTH: A FICO on the lower end of the FHA spectrum (659 and below) or debt to income ratio above 40 makes an FHA borrower more difficult to approve.
FACT: You're doing yourself, and more importantly, your clients, a disservice by subjectively eliminating buyers by pretending to know what you're talking about when it comes to lending.
Back in the stone age, FHA loans were a bit more tedious and time consuming than their conventional brethren. In today's world, FHA is often an easier loan to get done than a conventional loan. FHA is not more time consuming, it has less stringent underwriting guidelines, more flexibility in debt to income ratios and FICO scores, and borrower-friendly guidelines in regard to job and credit history.
Here are some common misconceptions
FHA borrowers are lower quality borrowers than those using conventional buyers
FALSE. FHA borrowers come in all shapes and sizes, just like conventional borrowers. A high quality borrower could be going FHA for several reasons. Perhaps they had a short sale 3.5 years ago - even if they never made a single payment late, they'd still be excluded by conventional guidelines, but welcomed with open arms to an FHA loan. Perhaps they're in a high cost area and can't afford a 10% down payment? FHA only requires 3.5% down VS a conventional high balance loan, which requires 10% down. In an area where even entry level home prices exceed $600,000 (aka A LOT of California), this is a big deal. How many of you have $60,000 (or had $60,000 in the bank in your 20s or early 30's)?
FHA loans have a tougher underwriting process
FALSE. The FHA underwriting process is VERY similar to the conventional underwriting process - an underwriter reviews the borrowers financials, makes sure the numbers fit FHA guidelines, and issues an approval. It's the same process as conventional underwriting - if the file meets guidelines and acceptable risk levels, it's approved.
FHA borrowers have a higher likelihood of being declined
FALSE. In fact, conventional guidelines have more pitfalls than FHA loans. Areas that can become problems on conventional loans (reserve requirements, use of non-occupant coborrowers, gift funds, tight debt/income ratio requirements) often fit very easily into an FHA loan because guidelines are more lax - reserves are almost never an issue with FHA, 100% of a down payment can be a gift, debt/income ratio maximums are higher with FHA.
An FHA Approval isn't as strong as a Conventional Approval
This one needs to go. FALSE. FALSE. FALSE. A pre-approval is a pre-approval, and a seller cares about 3 things - will they get their money. Will they get their money on time. Will they get their money without headaches or having to jump through hoops. Fact is, unless a house has safety issues or some other material defect, there is absolutely NO difference to a seller whether a buyer is using FHA or conventional financing. Fact is, there are TONS of reasons a buyer could be using FHA instead of conventional financing, and most of those reasons have nothing to do with the difficulty in getting them approved.
A lower FICO/higher debt-income ratio is a worse offer than a higher FICO/lower debt-income borrower
FALSE. In fact, I'll take a 640 FICO, salaried wage earner, first time home buyer using FHA and close them just as fast if not faster than an 800 FICO, self-employed buyer with multiple properties using conventional financing. The truth is, a pre-approval is a pre-approval, and if done right, it doesn't matter AT ALL what the FICO, debt to income ratio, or anything else reads. If they're pre-approved, they're pre-approved. The ONLY time a loan program will affect the odds of approval is in the case of a USDA file that has to be approved by a regional USDA office, and is also reliant on government funding being replenished, OR an instance where a buyer needs to use a portfolio or niche lender who may have longer underwriting turn times. Ironically, those borrowers using the portfolio/niche lenders that can cause delays are frequently high net worth, high FICO, high down payment, low debt-income ratio buyers that many agents mistakenly prefer to FHA buyers.
If you're an agent and you ask me, after receiving my pre-approval, "what is the borrowers FICO?", you show your inexperience, and your ignorance to the fact that the FICO has little to do with anything that concerns your seller. If the FICO was going to slow us down or cause a denial, you wouldn't have a pre-approval in your hands. Also, if you're telling your sellers that a borrower with a 740 FICO score is better than a 640 FICO score, you're doing your sellers a major disservice, because it is MISinformation, plain & simple.
FHA is not the perfect loan program. I hate the fact that it comes with a lifetime of PMI. I think the 1.75% up front PMI charge is too steep. For all it's faults, none of them affect a seller. None (unless that seller is selling a property with defects...which would also cause an issue with conventional loans). If we can approve a buyer with conventional financing instead of FHA, it's because doing so is a benefit to the buyer financially - it has nothing to do with a borrowers strength.
So what's a listing agent to do? My recommendation is to work with a lender you trust on the buying side, and if you're a listing agent, implement a vetting program for pre-approvals. In the meantime, PLEASE stop pretending you know what you're doing when it comes to recommendations made based on the type of financing a borrower uses. The FHA program should not be villified, and if you participate in considering FHA as a 2nd class loan program, you're doing your clients a major disservice - so much so, that I'd recommend your clients look for another Realtor - one that knows what they're talking about and is doing the best job in finding a qualified buyer - regardless of what loan program that qualification involves.
Please spread the word - FHA is not the bad guy in the lending world. In fact, FHA should be embraced as a viable loan option that opens the doors to more qualified buyers, more offers, and as a result, more money to a seller.
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