There is am over-abundance or REO Real Estate for sale in the Sunland – Tujunga area as well as most of Los Angeles County and even more when you look east to the Inland Empire, in areas such as the Hemet – San Jacinto Valley.
Today, nearly every REO offer I write or is presented to me for one of my REO listings, is for either a first time home buyer or a move up home buyer is an FHA backed loan – and for good reason. FHA only requires a 3% downpayment and will even allow the seller to contribute 3% towards the buyers closing costs as well as an additional 3% into a downpayment assistance program. In essence, the FHA is underwriting home loans with virtually little or no money out of the home buyer’s pocket.
Unfortunately, there are a few hurdles to clear and obstacles to avoid when writing an offer for a REO home for sale in Sunland – Tujunga… and they are the same in the Inland Empire area of Hemet – San Jacinto.
The First Hurdle – Understanding What is an FHA Loan
The FHA is a government agency – the initials stand for FEDERAL HOUSING ADMINISTRATION and part of HUD or HOUSING and URBAN DEVELOPMENT. As a Government agency they are tasked with helping American families purchase residential real estate
The FHA is not actually in the loan business – they don’t loan money to anyone to buy a REO property in either the Sunland – Tujunga area or in the Inland Empire area of the Hemet – San Jacinto Valley.
What the FHA does is guarantee loans, or insure them. So long as a loan conforms to FHA Guidelines when it is written, the FHA will guarantee 100% of the loan value, in case of default. The FHA does not set its own guidelines but relies on HUD standards to determine which loan the FHA will insure.
FHA programs can both be very strict in the current rapidly declining real estate market while at the same time offer the most flexibility in the market today. Since they are a government agency who is tasked with providing housing to everyone who can qualify for their own home, they are very flexible.
FHA guidelines are always subject to change. At the time this article was written, I believe the following are all acceptable FHA guidelines:
- The FHA Will allow 97% Financing – This means only a 3% Downpayment
- Your Downpayment can be a Gift from a member of your family, a relative or even a grant from a non profit organization. There are many that can be found by doing a Google Search for the term "Downpayment Assistance", FHA, CA where nearly 72,000 results are shown.
- An FHA Loan can be for either a purchase money loan or a refinance – even a cash-out refinance.
- An FHA Loan can be written for purchase money, a refinance or even a buy down mortgage.
- The FHA will allow 3% of your closing costs to be paid for by the home seller. This can mean 100% financing if the home seller contributes 3% for your closing costs and another 3% towards your down payment, through a downpayment assistance program as referenced above.
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Perhaps one of the strongest features of an FHA Loan is that it is not credit score driven – FICO scores, or credit scores are a mandatory criteria in most other loan programs, such as those insured by Fannie Mae or Freddie Mac.
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ü The FHA has the most flexible guidelines when it comes to considering down payment, your credit score, and you income level.
- The FHA will lend on most residential properties – from a standard single family detached home, a condo, townhome, a duplex, triplex and even a four-plex.
Please do not consider this list to be the final authority. I am a REALTOR® and I help families and investors buy and sell REO homes. These are the guidelines as I understand them, from what I believe to be current information. I am not a lender, I do not do my own loans when I sell real estate – for that I rely on a team of seasoned professionals who only write loans – and today, many of these are FHA loans. I would highly recommend that you contact an expert in lending to determine exactly what is going on in the market at the particular time you find yourself needing a FHA loan. I highly recommend John Severino at Capital Lending Corp. and Joey Aszterbaum with the Mortgage division of Altura Credit Union, Patrion Mortgage. (Both have a blog here on ActiveRain you can search for.)
The Second Hurdle – Will the Seller Qualify?
Unfortunately, getting a good FHA home loan for the real estate you want to buy in the Sunland – Tujunga area or anywhere in the Inland Empire area of Southern California, does not only rely on the home buyer qualifying, the real estate meeting the guidelines of the FHA but also the Seller must qualify.
No, the Seller does not have to have good credit, but they cannot be flipping the property – or taking possession and turning around and selling it for a quick profit.
I have heard contradictions to this requirement – not contradictions if it exists – but what the time frame is for the previous owner to won the property before they turn around and sell the home for sale.
I have heard both 90 days and 180 days. Check with your lender, if this might be an issue.
The time line ends when the contract is signed – not when escrow closes – so again be careful.
This can be very difficult with REO properties. The reason being, when the bank takes back the property from the former homeowner in the foreclosure process, they will typically put the home up on the market within a couple of weeks; hoping for a quick sale.
Fortunately, the only exception the FHA will make to this rule is if the real estate is bank owned. Of course, with the government, there is always a hitch, right? No exception here. The bank that owns the property MUST be either a Federal or State charted bank. The good news is the majority of banks do have either a Federal or State Charter – but not all of them. Other government owned homes also qualify for the exception – for example homes owned by Fannie Mae or Freddie Mac.
The down side to obtaining the FHA flipped property exception is time. More often than not, the FHA is taking two weeks or more, just to grant the exception.
Clear The Hurdle
There are a few things that your real estate agent and loan officer can do, working as a team, to minimize the effect that this section of government red tape can have on the purchase process of your bank owned REO home, that is for sale.
First, your real estate team of professionals should research the real estate history through the county website or the Title company website, that they both have access to.
If the real estate for sale has been owned by the bank for less than 90 days, it will be important that the buyer accumulate all of the necessary documents quickly to submit with an FHA Loan package. Your lender will provide a complete list, but will include stuff like pay stubs and bank statements. You should have already prepared this before you started looking for homes.
When your real estate agent writes the offer, he should ask for a minimum of a 45 day escrow so you are not subject to requesting an extension and possibly incurring per diem charges for not closing escrow on time.
If the bank that owns the REO property for sale is not a Federally or State Charted bank then you need to either consider other financing options or another home to buy.
The Third Hurdle – What’s the Home Really Worth?
In a rapidly declining real estate market, as we find our selves in today, sometimes it is hard to tell what a home is really worth. Even as prices are dropping far from their previous high points of only a few short years ago. Today a month can have a significant impact on the value of a home for sale.
When a buyer is requesting that the seller participate in the down payment assistance or contribute towards closing costs, these costs may be ‘stacked’ or added to the purchase price.
For example a home is listed at $100,000 and the buyer wants both the 3% down payment assistance and 3% seller contribution towards the buyers closing costs. So, instead of asking the seller to discount the purchase price and reduce their net return, they will ‘stack’ the fees on top of the offer price, offering $106,000 – so the seller nets the same bottom line at the close of escrow.
This can cause a problem when the appraiser looks at the comps and condition of the home. If the value is not there, don’t expect the appraiser to fudge the numbers on your behalf. They get paid regardless and ‘fudging’ anything is considered mortgage fraud, which is punishable by jail time and hefty fines.
Clear The Hurdle
Your Real Estate agent should be familiar with the neighborhood and local market conditions. This is why it is so important to use a local real estate agent, whenever buying or selling a home, anywhere in CA.
Your Agent should pull recent comps from the local MLS – showing what homes have recently sold, what is in escrow and the value of comparable listings currently on the market, for sale. The comps should all be within 3 months of age, and if possible from the same tract of homes or neighborhood. The closer the comp, the more value it has to determine the value of the home you want to buy.
The Fourth Hurdle – The Condition of the Property
FHA guidelines are very clear. In essence, a home has to be in near move-in condition when the home closes escrow. The FHA will not loan on a home that has boarded-up windows, missing carpet, empty non-working pools, missing air conditioners or other appliances, exposed electrical, holes in walls and other issues that would make the home unsafe, unhealthy or uninhabitable.
Although the FHA does have a program for repairs to be done at the close of escrow, they just are not getting through the process right now. Not to say they are impossible, but they are not getting funded. Remember, the FHA just insures a loan, they don’t loan their money – there is still a lender involved who will be writing the check so you can buy your bank owned REO home.
Allowances asking for “cash back” at the close of escrow for repairs, such as new carpet allowance or an appliance allowance just will not happen with an FHA loan.
Clear The Hurdle
It is possible to ask the seller to do the repairs, once the appraisal has been returned, identifying the needed repairs.
Depending on the requested repairs, you may consider asking for a reduction in the sales price. However, all this does is reduce your monthly payment and not give you the cash to get the home re-habbed.
There are often obvious repairs that will need to be made to meet the FHA guidelines. Ask the seller to make these, prior to the appraisal, to minimize the red flags the appraiser sees. It may be possible for you to go in and make the repairs yourself, prior to the close of escrow, but many sellers – especially intuitional sellers like the banks who own the REO properties for sale will not allow you or your workers on the property to do any repairs or maintenance, because of insurance and liability issues.
The Fifth Hurdle – The Spouse Who is NOT on Title and Has Issues
This is the big blind side that I have seen take place in the market over and over again when buyers open escrow with me for a bank owned REO property. The offer comes in with just one spouse as the buyer.
Conventional loans will allow only one spouse on the loan and will not take the other spouses income, debt or credit into account. However, the FHA believes the Bible when it says the “two shall become one”.
Granted, the non-title spouses’ credit can not be considered, but if the score is low, chances are there is debt there that must be considered with the borrowers obligations. This will certainly affect the debt to income ratio.
Clear The Hurdle
The only way to clear this hurdle is to be aware of it going in to the loan process. If it is going to be an issue, then you will have to look at more traditional financing
FHA loans are more popular than ever whether it comes to buying bank owned REO Sunland – Tujunga home or an Inland Empire REO home in the Hemet – San Jacinto Valley. Because of the flexibility in the qualifying guidelines they have become the first choice for many first time home buyers. However, recognizing that there are hurdles to clear, it is best to prepare for each hurdle before you find yourself in the “11th Hour” scrambling to make something work.
About the Author: John Occhi REO REALTOR®, successfully started an REO Team in the Hemet – San Jacinto Valley, CA that quickly expanded to 3 agents and 2 admin members with over 50 REO properties under his direct control. He was able to keep approximately 20% of his assigned inventory in escrow at any given time and another 20% entering the pipeline with properties in the pre-marketing phase of the business. Today John has been sought out to assist one of the largest franchises in America, Century 21 Crest, to expand their REO operations from the Los Angeles County foothills into the Inland Empire.
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