Urban legends, mythology and the FHA loan

FHA loans have been an alternative loan for first time home buyers since the 1930’s. FHA stands for “Federal Housing Administration” Simply put an An FHA loan is a mortgage insured by the Federal Housing Administration.

The loans have advantages. Buyers only need a 3.5% down payment and there are other advantages. First time home buyers in particular should ask their lenders. The FHA loan might just be the best or only way to get the money to buy a house.

Buyers and sellers should not believe everything their real estate agent tells them about these loans. FHA appraisals are different than appraisals for other types of loans.

When a home buyer is getting a loan to buy a property the lender they are getting the loan from has to send out an appraiser to make sure the property is worth as much as the buyer is borrowing. The home becomes collateral for the loan.

The FHA appraiser determines the value of the property and also inspects it to make sure the it meets ” HUD’s minimum standards for health and safety” That kind of appraisal isn’t done for conventional loans. VA (veterans administration) loans also require a safety inspection as part of the appraisal process.

The FHA inspection is where much of the mythology comes from that surrounds these loans. I have had real estate agents tell me that all sorts of things will not pass an FHA inspection . . yet they do. If something does not pass an FHA inspection often a repair can be made so that it will pass. As a result home buyers sometimes do not make offers on houses they really want to buy, and sellers say no to FHA financing miss out on having the largest possible pool of qualified buyers.

FHA is not particularly picky about windows or the age of a boiler. They are picky about peeling paint that may contain lead and they will ask that a handrail be places along stairways. Leaky roofs won’t pass and neither will heating plants that don’t safely heat the house. Bedrooms must have egress windows and windows must open and close. While it is expensive to add egress windows it isn’t that big of a deal to repair a window so that it opens and closes.

HUD’s primary concern is the health and safety of the home buyer who will actually live in the house. Thus, most of their appraisal / inspection checkpoints have to do with health and safety aspects of the property. Above all, the home must be habitable and comfortable, without any potential hazards to the occupant.

HUD standards have changed over time but many real estate agents have not kept up. It doesn’t hurt to ask your lender or  read the guidelines. As a home owners myself I want my home to meet minimum safety requirements and would be inclined to make repairs for a new owner. After all we bought the house using an low downpayment FHA loan ad a forgivable silent second mortgage that helped with the closing costs.

The widening net wealth gap

Right now average monthly rents are higher in St. Paul than the average house payment, making owning attractive to many. It never ceases to amaze me the way a person can pay rent each month but not be qualified to buy a home and pay less each month but it happens.

Owning real estate is a strategy for building wealth. Homeownership takes planning. There are downpayment assistance programs and loans that require less than 5% down.

 

Net worth - NAR
Net worth – NAR

Open house dos and don’ts

open_houseOpen houses are a great opportunity for buyers to just look at houses.  Here are some tips about how to do it right and even though lists should always be in multiples of 2 or 5 I decided to break the rules.

1. Take your shoes off. Wear shoes that are easy to get on and off.

2. If asked to sign in do so, you are in someone else’s house and they make the rules. If you do not want to leave an email address don’t.

3. If you are working with an agent let the agent at the open house know even if he or she doesn’t ask. Give the agent at the open house the name of your agent.

4. Keep an eye on your children do not let them run around the house unaccompanied.

5. Be careful what you say. Giving a the real estate agent too much information can hurt later on if you want to buy the house or another that the agent has listed. However it can be fun to listen to what other buyers are saying. 🙂

6. The agent at the open house may be very nice to you but they do represent the seller and are supposed to act in the sellers best interest.

7. The main reason an agent has an open house is to meet potential clients and that is why they may recommend other houses if you don’t like the one that is open.

8. The agent at the open may not be the listing agent. Sometimes it is another agent in the same office. That agent may or may not know the house.

9. If at all possible if you decide to buy the home you saw at the open get assistance from a buyers agent to avoid dual agency.

Keep in mind that only a very small percentage of the homes for sale have open houses. It is important to search for homes for sale on the internet and to view as many as possible on line.  Make appointments for private showings to see the homes that are the best fit. Don’t wait for an open house because there might not be one and some houses sell the day they go on the market of sooner.

Home Buyers should verify measurements

tape measure

Our MLS shows the measurements for homes that are on the market. Including room sizes, which floor the room is on, the foundation size, the total finished above and below ground square footages.

There are some things home buyers should know:

1.   Not everything you read in the MLS is 100% accurate, which is why if you read the fine print it will say the information is “deemed reliable but not guaranteed”.  We strive for accuracy and there are checks and balances, but mistakes are made. Total square footages and room sizes are not always accurate.

Generally agents do not deliberately misrepresent room sizes or square footages but sometimes they make mistakes and sometimes they just use the last set of measurements that were in the MLS without verifying them.

2.   Finished Square footage is not equal.  What I mean by that is that below ground square footage is not as valuable as above ground square footage is so when looking at the totals check to see how much is above ground and how much is below.

3.  Property tax records do not always show an accurate square footage and the square footage is used in the record to calculate the value of the home.  Sometimes buyers like to use tax records as a source of information about property values.  If the square footages are wrong the value could also be wrong because size matters.

There are rules about what can be included in finished square footage. Certainly closets, hallways and bathrooms are included even though we don’t see measurements for them separately in the MLS.  If there is a finished room that is surrounded by unfinished space we can not include it in the finished square footage.  Sometimes there will be one room finished in the basement but the space outside the room is unfinished.

It isn’t always easy to get accurate measurements.  Some rooms have irregular shapes and we are only allowed to put two measurements in the MLS for each room.

It should be noted that the source of the information about homes for sale is the Northstar MLS which feeds data to sites like Zillow and the web sites of real estate companies. MLS online is not the MLS but a real estate company. Confusing I know but it is what it is. 

**real estate is local if any of these rules apply outside of Minnesota it is purely by chance. 🙂

Also see Legal Bedroom

Homes for sale . . or not

Homes for sale in St. Paul

There has been a shortage of homes for sale for a few years now. It takes awhile for trends to reach the mainstream media, which is why real estate bloggers are important. 🙂

I read all sorts of reasons for this phenomena. There were a few years during the housing crash and great recession when the inventory of homes for sale was abnormally high. There isn’t any point in comparing 2008 and 2009 to 2017.

A normal number of homes for sale would be somewhere between 3 and 4 times as many as we have on the market right now.

There are several reasons why we are seeing fewer homes on the market. Here are a few:

  1. Baby boomers own a lot of homes and are in an age group that is more likely to stay put than move.
  2. There are people who are hanging onto homes because they are still underwater or are waiting until their home is worth a certain amount.
  3. People who want to move to another house are holding off putting theirs on the market until they can find a home to buy.
  4. During the housing crash investors bought up a lot of homes, especially starter type homes and small condos. These homes have become rental properties and will not be going on the market anytime soon.

We could build our way out of this, yet there isn’t a lot of new construction. There are still vacant buildable lots left over from the recession and vacant houses too. The new construction and in fill building I see is expensive housing.

Local building codes do not allow for a lot of creativity. What we need the most is affordable housing, maybe tiny houses and micro apartments. Builders tell me that luxury housing is more profitable to build.

Eventually there will be a kind of sell off when large numbers of baby boomers put their homes on the market. Experts were predicting that the great sell off would start in 2020. Now some are predicting it will start in 2025.

Home buyers need to be patient and somewhat flexible. Houses are being sold every day. They are not just for sale in May either.

It is a great time to be a home seller but there are limits to how much sellers can get for their homes. Sellers who are willing to negotiate will get the best terms and the fastest sales. Finding a buyer for a home for sale is fairly easy but is just one part of what it takes to close a sale.

Also see Home seller expectations sky rocket

Tips on how to win in a multiple offer situation

Windowbox
Spring

Yes you can survive a multiple offer situation and be the winner. Be realistic about the value of the home you are making an offer on and understand that sometimes in multiple offer situations the highest offers are below the asking price or maybe at or slightly over. Also know that if it doesn’t work out a better house will come along.

Occasionally I work with buyers who are concerned about the amount of work I have to do to write an offer. That is my job and I am always happy to write an offer even if it seems to be a long shot, so bring it on.

Serious buyers will need to put their best foot forward and make their first offer their best offer in a multiple offer situation because they may not get the chance to negotiate. Often buyers imagine scenarios where they offer X amount and sellers counter at X amount and they end up getting the house for the amount they had in mind. In todays market the seller is calling the shots.

The best offer isn’t always the offer of the most money. Financing is important too. Buyers who are putting more than 5% down may have an advantage. More cash in the mix means that there is a greater chance that the loan will close.

Closing dates matter. Buyer who are inflexible will have less negotiating power. The best strategy is to ask your agent to find out what the sellers have in mind for a closing date. Sellers who need to move into a home that they have an offer on may have to pass on an offer that is 110% of the asking price with a closing in 90 days or maybe the offer is perfect for them.

Flexibility on possession date and time can be important. I have seen situations where sellers need to move out of one home and into another on the same day that they are closing on both the sale of their home and the purchase of another. Not an ideal situation but it happens. Buyers who can allow the seller a little more time to move out can have an advantage in a multiple offer situation that doesn’t cost them a dime.

The amount of the offer is important. I have never seen a lowball offer win in a multiple offer situation. If the home just came on the market today the seller may not be ready to consider a less than full price offer. Buyers sometimes offer less because that is how much they can afford. That strategy mostly isn’t going to work.

When the perfect home comes on the market it may be sold by the weekend, be ready to make an offer now.  Have a pre-approval letter ready. See the home as soon as you can and make an offer or let your agent know you want to make an offer as soon as possible. Sometimes sellers will wait a few hours or even a day for an offer even though they have others if they know the offer is coming and the reason for the delay.

Assuming that the sellers have a lot of money that they can contribute to closing costs is a mistake. Sellers who owe a lot of money on a home may not have the resources to pay the buyers closing costs. An offer that does not require a seller contribution may be more attractive to a seller even though it is for less money.

Do not and I repeat DO NOT skip the inspection – do make your offer inspection contingent. Some buyers are making offers that are not inspection contingent in hopes that the seller will consider it a better offer. Sellers with half a brain should know that the inspection protects them too. Please have a complete home inspection before purchasing a home.

Work with an agent who is prepared and who can quickly write an offer and one with a lot of experience in multiple offer situations.