Home Buying in California>Question Details

Crissa Kenta…, Home Owner in Santa Cruz, CA

Why is it legal for REOs to not accept FHA loan offers?

Asked by Crissa Kentavr, Santa Cruz, CA Wed Nov 18, 2009

I know this isn't really a direct and easy question.

That banks are able to ignore offers from FHA lenders seems to undermine the entire reason for having FHA at all. Conventional loans will still have many of the same requirements to repairs. In fact, all the loans I've been offered, FHA or not, have the same requirements on the condition of the house "To protect the lender" they say.

I've inspected the house, and nothing seems out of place.

Help the community by answering this question:


203ks don't work in my target county because the county planning department 'won't work with them' and gives a shortest permit estimate of eleven weeks.

FHA doesn't have more in default than average; nor is any bank any faster responding to me for other types of loans. The seller-banks just don't seem to have noticed that it's not 2006 anymore.

It seems entirely against the reasoning for FHA if entire swaths of houses are offlimits not due to actual condition. If their water and power is off, why can't you have power and water turned on for the inspection? The rules seem to not be to protect anyone or any bank, but to make it tougher for people to buy houses, period.

The 90-day no-flipping doesn't stop flipping, it stops FHA buyers from having repaired houses. The 180-day appraisal hold of an appraisal you can't see doesn't protect buyers or banks at all, since it's a hold that's longer than the training period to make the appraisal in the first place.

It's so confusing.
0 votes Thank Flag Link Thu Nov 19, 2009
Hi Stacy,

The banks stay away from FHA loans because most of them need work and are sold as is.
FHA financed home buyer only have 3.5% for a down and most of the time don't have the closing costs.
And, do not have the money to do the pairs once the FHA inspector comes in and points out the issues.
The repairs are not cheap, they might find dry rot, termites, and so on.
The bank already took a loss when they took the house back (foreclosed on it) and they need to come up and pay for $5,000 to $12,000 to meet FHA's minimum guidelines. It doesn't make sense to the banks bottomline.

Offers have dropped out of escrow because banks didn't want to pay for repairs or retrofits.
And, usually take from 40 to 70+ days, when there are issues in the financing.
My recomendation is to get an underwritters approval instead of carrying around a pre-approval letter.

I know it sucks, but keep on looking, everything happens for a reason as I tell my clients.
You are frustrated right know but in a couple of months you might have a better home than the ones that you didn't get.
It just works out that way, it's weird but, that's the way it has worked out for my clients.

Best wishies,
Jes Sierra, B.Sc.
Century 21 Beachside Realtors®
Chino Hills, CA
0 votes Thank Flag Link Thu Nov 19, 2009
One things that was not mentioned. FHA is having serious problems now. They have just above 1/2% reserves when they are mandated to have 2% or more in case of foreclosures. FHA now has 8% of loans in default.

Is it possible that many banks are aware of just how precarious a shape FHA is in and are afraid the loan will not work when they need to make a sale?

Besides, most FHA buyers barely qualify for a purchase. And who knows how the banks are looking at them. Could the bank be thinking FHA buyer= next years foreclosure? Maybe.
0 votes Thank Flag Link Thu Nov 19, 2009
Dan brings up a good point.

FHA not only has stricter guidelines but these people do not have a ton of money. So what you will find is lots of these banks like to have the loans done through them so they feel better but if they are backing a FHA loan they might be looking for the future.

As if you have 10-20% down you have more money in the pot and are more financially invested to staying there.
Web Reference: http://www.SeanDawes.com
0 votes Thank Flag Link Thu Nov 19, 2009
It is not about legal or ilegal. It is about their Standards.
Most of the time is about property condition. Regular FHA has property standards.
In Minnesota on winter time, most if not all foreclosures has the water tuned off. That is a NO for regular FHA.

Chip windows, could be ok, complete broken windows, might not be ok. Peeling paint, home built before 1978, not OK.

Good reading:

What about a 203k? Have you heard about it?

0 votes Thank Flag Link Wed Nov 18, 2009
As I said, no bank would offer me a conventional loan without the same restrictions - aside one, the 'FHA safety inspection'. They wouldn't loan on a house that failed a pest inspection without 20% down above any costs to repair.

It just seems like a strange impasse. Bank on one hand saying 'No FHA!' when what they really mean is 'We want to sell this like we used to!' while the Lenders are all saying, 'No business as usual!' which just means these houses spiral down in price until picked up by some investor, not someone to live in them.

It seems entirely against what FHA is for.
0 votes Thank Flag Link Wed Nov 18, 2009
Stacey -

It is frustrating but a reality of this market. My experience is that both FHA appraisers and FHA underwriters have more stringent guidelines. It is an FHA underwriter who is more likely to ask to see the pest inspection and request any Section 1 work (active infestation) be completed prior to funding. For REOs, the asset manager consider it an extra liability to have workers in the home prior to close of escrow and therefore prefer an AS IS sale.

Generally speaking if the inspections are not included as part of the contract, most underwriters do not ask to see the inspections. It is normally a credit request or repair request that triggers the underwriter to want to see the reports. Because "wood destroying pest" can cause so much damage to a home and that home is the collateral for the loan, you can see why underwriters might ask to see the reports.

Prior to the 1990s it was not uncommon at all for the lender to ask for section 1 clearance prior to providing a loan on a home. But in the boom market, many of those rules went out the window. The bust has made lenders reconsider how it use to be done.

Finally, since most buyers with FHA loans are only placing 3.5% down, you can see how a $10,000 termite bill could place any equity/value in danger. When a buyer is placing 20% down there is less risk to the value.

In this market, both lenders and sellers (foreclosure investors in particular) are looking to limit the risk going forward. For the asset manager/seller conclusion is that FHA presents another risk that the transaction may not go through. For the lender, low down payment require more scrutiny on the overall condition of the home.

Stating all the reality does not make it easier for buyers or their agents when competing on an offer to purchase a home. I have been equally frustrated by the amount of competition there is in the market right now and how it has been more negative toward FHA buyers/offers.

Not sure this helps but know that your not alone.

Web Reference: http://www.TalkToCJ.com
0 votes Thank Flag Link Wed Nov 18, 2009
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