The most common expression in the Real Estate world today is “FRUSTRATED FHA BUYER”. It applies to their agents as well.
The vast majority of the bank owned properties on that come to market are broken, neglected, vandalized, abused bombed out houses. They do not qualify for FHA financing, which is how 90% of the buyers are buying today. Almost all other forms of conventional financing have gone away if you don’t have a BIG down payment. FHA has a “livability standard” that the property has to meet. It can be ugly, but it can’t be broken. It has to be functional without the buyer HAVING to spend money after the close to get the furnace or plumbing working or to install new bathrooms, or carpet/flooring etc. These houses get sold to investors.
The bank owned foreclosures that can meet the FHA livability standard are few and far between, and often the banks are taking cash investor offers for less than the FHA buyers are offering. There’s way too many first time home buyers for the number of FHA eligible properties. Frustration is the result.
To make things worse, even after the investor buys the foreclosure, fixes and cleans and decorates it up, FHA says that they can’t resell it to an FHA buyer for 90 days, and that even after 90 days, it can’t sell for more than 20% over what the investor paid. That’s the anti flip rule that’s being waived starting February 1.
THIS IS HUGE.
To keep the new rules from being abused, and to keep the buyers from being gouged, there’s 2 new provisions going into effect. The underwriter can require 2 independent appraisals, and the property will now HAVE to be inspected, and the underwriter gets to see the inspection report. We’ve always REQUIRED buyers to get the homes inspected, but the results became negotiating points with the seller, and often, broken things got left for the buyer to fix as part of the negotiation. Now the underwriter will be able to force the seller to fix things that might have been glossed over, or negotiated away previously. VERY GOOD!
The new guidelines are on the HUD website, and here’s the press release that came out this morning.
WASHINGTON – In an effort to stabilize home values and improve conditions in communities where foreclosure activity is high, HUD Secretary Shaun Donovan today announced a temporary policy that will expand access to FHA mortgage insurance and allow for the quick resale of foreclosed properties. The announcement is part of the Obama administration commitment to addressing foreclosure. Just yesterday, Secretary Donovan announced $2 billion in Neighborhood Stabilization Program grants to local communities and nonprofit housing developers to combat the effects of vacant and abandoned homes.
“As a result of the tightened credit market, FHA-insured mortgage financing is often the only means of financing available to potential homebuyers,” said Donovan. “FHA has an unprecedented opportunity to fulfill its mission by helping many homebuyers find affordable housing while contributing to neighborhood stabilization.”
With certain exceptions, FHA currently prohibits insuring a mortgage on a home owned by the seller for less than 90 days. This temporary waiver will give FHA borrowers access to a broader array of recently foreclosed properties.
“This change in policy is temporary and will have very strict conditions and guidelines to assure that predatory practices are not allowed,” Donovan said.
In today’s market, FHA research finds that acquiring, rehabilitating and the reselling these properties to prospective homeowners often takes less than 90 days. Prohibiting the use of FHA mortgage insurance for a subsequent resale within 90 days of acquisition adversely impacts the willingness of sellers to allow contracts from potential FHA buyers because they must consider holding costs and the risk of vandalism associated with allowing a property to sit vacant over a 90-day period of time.
The policy change will permit buyers to use FHA-insured financing to purchase HUD-owned properties, bank-owned properties, or properties resold through private sales. This will allow homes to resell as quickly as possible, helping to stabilize real estate prices and to revitalize neighborhoods and communities.
“FHA borrowers, because of the restrictions we are now lifting, have often been shut out from buying affordable properties,” said FHA Commissioner David H. Stevens. “This action will enable our borrowers, especially first-time buyers, to take advantage of this opportunity.”
The waiver will take effect on February 1, 2010 and is effective for one year, unless otherwise extended or withdrawn by the FHA Commissioner. To protect FHA borrowers against predatory practices of “flipping” where properties are quickly resold at inflated prices to unsuspecting borrowers, this waiver is limited to those sales meeting the following general conditions:
• All transactions must be arms-length, with no identity of interest between the buyer and seller or other parties participating in the sales transaction.
• In cases in which the sales price of the property is 20 percent or more above the seller’s acquisition cost, the waiver will only apply if the lender meets specific conditions.
• The waiver is limited to forward mortgages, and does not apply to the Home Equity Conversion Mortgage (HECM) for purchase program.
Specific conditions and other details of this new temporary policy are in the text of the waiver, available on HUD’s website.