Switching from conventional to fha and worry that the loan may not go through although my lender said that everything is good...

Asked by Charlie, Buckeye, AZ Fri Jan 13, 2012

The rate is locked and the appraisel has been ordered but there has not been an addendum to the contract. The house is a short sale but we are in the last stage.... everything was approve already conventional... should I worry?

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Loren Hoboy, Agent, Phoenix, AZ
Sat Jan 14, 2012
Your lender is clearly not looking at the full picture.
1)Any change to the approved short sale contract including a change in loan type will require the Seller's SS Bank approval. This can take from 1-week to 2-months.
2) Any delays in meeting the SS Bank's closing date can kill the deal. Remember that the bank will continue towards a foreclosure and may not give the seller an extension. The Short Sale department and the Foreclosure Departments within the often bank don't cooperate. It is a risk to be considered.
3) FHA loans require the home be move in ready. The appraiser will often set conditions on the loan. I had one tell us the back door lock did not work (was a little tough to turn) and we had to install a new lock and pay them for a second trip to confirm the work was done. This can delay closing.
4) You entered into a legally binding contract, representing that you were doing a conventional loan and specifying that you would be putting down a certain percentage. When accepting the contract, both the Seller and the Seller's SS Lender took that into consideration. To change to an FHA loan you will need to send them an addendum and get their approval. If they don't agree , you may be in breach of contract and subject to loss of your earnest money.
5) By switching to a FHA loan and away from a Conventional Loan have you considered the increase in your monthly payments due to the requirement that you pay Mortgage Insurance. This is a very expensive monthly cost that is hard to justify just to lower your down-payment, unless of course the problem is that you no longer have the down-payment amount.
Talk to your Realtor, your Lender and other advisers before making the change. There are both increased cost and risks to be considered.
1 vote
, ,
Fri Jan 20, 2012
Thank you for your detailed answer, Randy.

You confirmed my thoughts on this matter, that being that if the purchase is ready to fund on the COE date & there were no additional costs to the seller, that the bank would more than likely still allow the sale to take place.

As I review the language from the Changes section of the standard AAR Purchase Contract, this time from a slightly different point of view, I am reading this as the contract spells out that the Buyer can change loan programs per the contract, "without prior consent of the Seller if such changes do not adversely affect Buyer’s ability to obtain loan approval ..."

The other component on a Sort Sale situation would be, what does the Short Sale Approval say about this, if anything...


I hope all is going well for you on your purchase.

Thanks again, Randy,
0 votes
Randy Hooker, Agent, Chandler, AZ
Sun Jan 15, 2012
Hey Roswell, I'm sure you're well aware of this quote from page 2 of the standard AAR Purchase Contract, but here it is for reference:

81. Changes: Buyer shall immediately notify Seller of any changes in the loan program, financing terms, or lender described in the
82. Pre-Qualification Form if attached hereto or LSU provided within five (5) days after Contract acceptance and shall only make any
83. such changes without the prior written consent of Seller if such changes do not adversely affect Buyer’s ability to obtain loan
84. approval without PTD conditions, increase Seller’s closing costs, or delay COE.

In your 'what-if' scenario, if the buyer switched to an FHA loan and never told the seller, everything went smoothly with the FHA appraisal, no additional costs were asked of the seller, the loan docs showed up at title on time, and the transaction closed escrow on time (per the contract) -- then my best guess (and it's strictly a guess) is that the seller and the seller's agent would not have a problem whatsoever.

However, as we all know, the chances of that happening are somewhere between slim and none. And in the event of a major 'crash and burn' scenario, the buyer would be guilty of failing to adhere to the above contractual stipulations. That might lead to a Cure Period Notice being issued by the seller, and if the default was not cured in a timely manner, then the seller could cancel the contract and keep the buyer's earnest money.

None of this should be construed as legal advice or legal interpretation of any specific situation. It's just my hypothetical opinion, given the hypothetical conditions you laid out, use of standard AAR contract, no addenda to the contract, etc., etc. As always, any buyer or seller who finds himself or herself in this situation should immediately consult with their RE agent, if not an attorney.

You have anything to add, Roswell?? ;-)
0 votes
, ,
Sun Jan 15, 2012
A "what if" question for the real estate agents who answered this question:

Based on this question, what do you think will happen if the buyer goes to closing, on time, with an approved FHA loan?

The SS Bank reviews the HUD & notices that the loan was switched from a Conventional loan to an FHA loan. The closing takes place on the date specified in the contract, so there are no delays, & the purchase price approved by the SS Bank & agreed to by all parties is being paid. There does not seem to be a "material" change to the contract damaging a party to the contract - the property was purchased for the amount agreed upon on the date spelled out in the purchase contract.

To be clear, I am not advocating this action, as I am sure it could be costly in a number of ways; I'd just like to hear the real estate agents' point of view on this.

0 votes
Andrew Texid…, Agent, Litchfield Park, AZ
Sat Jan 14, 2012
I wouldn't be concerned with changing loan programs for the purpose of getting short sale approval as your agent can make an addendum and should, changing the loan from a conventional to fha. I would have a concern about why the lender has decided to change loan programs. FHA is funding the majority of financed homes nationwide because of low down payments and HUD is the one that didn't get crushed in the last mortgage meltdown, but what caused the change from a conventional loan to FHA? Buckeye is considered rural, so if you were getting a USRDA 100% loan, then switching to fha, will have similar underwriting guidelines, but a 3.5% down payment.

Andrew Texidor
Solutions Real Estate
0 votes
Randy Hooker, Agent, Chandler, AZ
Fri Jan 13, 2012
Yes, you should be concerned. You need to contact your Buyer's Agent and/or Seller's Agent and make them aware of your change in loan product. And... why in the world, on a short sale no less, would you change loans at the 11th hour like that?? You may really be throwing a monkey wrench into the short sale approval.

Best of luck!
0 votes
Kathleen Lor…, Agent, Baxter, MN
Fri Jan 13, 2012
FHA has much stricter requirements for a property than a conventional loan normally would- it will need to be appraised by an FHA appraisor who will call out problems such as broken windows, missing railing etc.These will need to be fixed prior to close and in a Short Sale you are to be buying the property "as is".
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