Congratulations! We have an offer on your house! As you look through the contract, it’s easy to focus on the main terms: Price and closing date. Here’s where you really need an agent to focuses on the details of the offer. The details of the buyer’s financing plan are just as important as the price and closing date. Even though you may get a top-dollar offer for your home, for our example today, let’s assume that the buyer is planning on obtaining FHA financing for their purchase.
One of the big reasons that a buyer gets an FHA loan is that it enables them to purchase a home with less money out-of-pocket. The minimum down payment requirement for an FHA loan is 3.5% of the purchase price (the down payment can be even less when an FHA loan is paired with another loan program or grant).
With a conventional loan, or with a typical appraisal, the purpose is to identify the value of the property, based on its condition. An FHA appraisal goes a step further and identifies the value of the property AND any safety/fire hazards and perceived major maintenance issues that could be cost-prohibitive for the buyer to take on in the near future. Due to the low down payment requirement, this may mean that the buyer doesn’t have a lot of discretionary funds to deal with appraisal-related repairs. The result of the FHA appraisal can extend the timeline for selling your home, or make the transaction completely fall apart. According to local appraisers, loan officers, and issues that I’ve personally experienced through being a full-time agent, here are the most common problems that come up in FHA appraisals:
- Flaking/peeling paint
- Roof – Appraisers like to see at least 3 years’ life left
- Bowed or damaged foundation walls
- Poor grading or drainage issues
- Proximity to a gas station or other hazardous condition
- Deteriorated/rotted siding – particularly masonite or wood
- Electrical issues – Open splices, “amateur” wiring
- Bedroom windows not opening/closing freely
- Furnace/heating system malfunctioning
- Lack of a Shared Driveway Agreement
- Bonus Item! Issues may also come up if you have a home with a well or septic system, as banks usually require satisfactory results from a well and septic test (tests for which the buyer pays).
If a problem comes up, then what? This is why you choose me as your agent. From the time we get an offer, I can help you anticipate issues before they happen and address them, request that the buyer obtain conventional financing, or reject the offer if we feel that the house won’t “pass”. Of course, issues can arise and surprises can come up. The good news is that most problems have solutions!
Lenders/banks require that any repairs be completed before the closing (with an exception being exterior peeling paint, which cannot be addressed when it’s too cold to paint). If you already feel like you’ve agreed to a low price, these repairs still have to be done, regardless of the value that the home appraised at. In other words, you can have a contract sale price of $150,000, with the FHA appraisal coming in at $153,000, but the buyer still can’t get the loan if the appraisal mentions a bedroom window that doesn’t open smoothly!
Simply put, the repairs have to be done. Most of the time, you as the seller pays to have the items repaired. We can help you find good contractors who can do the job in a timely manner, and do it well at a reasonable price. Sometimes, it’s a simple repair that you can do himself, like painting, working on windows which have been painted shut, servicing a furnace, etc. Fortunately, the lender isn’t too picky about having an expert do the repairs; they just want them done well enough to pass a re-inspection by the appraiser. When the repairs cannot be done prior to the closing (as in the example of exterior peeling paint when it’s cold, or if a roof is covered with snow and needs to be replaced), a quote normally need to be obtained from a contractor, with 150% of the quote placed into an escrow (holding account), to be done as soon as possible after the closing. These repairs are then paid for out of the escrow account, with any funds left over going back to whichever party funded the account. Depending on how things get resolved, the buyer may be the one who funds that escrow account if they feel like they are getting a good price on the house. However, when you need to fund 150% of a $6,000 roof project, most buyers who are getting an FHA loan don’t have $9,000 to throw into the escrow account. As a result, the house may [sadly] go back on the market if you, as the seller, are not willing to do the repair. Depending on the repairs, I have professional relationships with some contractors who can wait until the closing to get paid out of your proceeds if you do not have the funds upfront.
The list above is more common with older homes than with newer homes, so if you live in an older home, the arrival of spring brings opportunities to look over your house and address some of these applicable items. For example, I have seen some lenders/banks postpone the closing due to lack of a shared driveway agreement (not uncommon in areas closer to downtown Champaign and Urbana). So, if you share a driveway with your neighbor, get an agreement written up so that you are ready to sell in a timely manner to an FHA buyer when you call us to sell your home. In our area within the past year, 7.72% of residential loans were FHA loans (plus 3.58% VA, which have a similar appraisal), so even if this wasn’t an issue when you bought your home because you paid cash or obtained a conventional loan, it’s plausible to get an FHA buyer, especially if you live in an area that is desirable for first-time buyers.
When we work together to sell your house, we will talk about many of the nuances that can affect your home sale, from the initial pricing and staging, through the entire “under contract” period. We don’t just want to have a great offer; we want to have a great closing, too! If we are going to take our house off the market for a buyer, I will help you do everything possible to ensure we close successfully and not find ourselves back on the market 60 days later (the approximate time it takes to obtain an FHA loan), having missed out on other potential buyers.