Nearly 5 million homes are financed with mortgages guaranteed by the Federal Housing Administration. At first glance the sheer size of the FHA program would seem to confirm its wide acceptance. Yet FHA financing can present a variety of hazards to the seller who fails to be careful.
To start, the FHA does not lend mortgage money. The federal agency provides certain gurantees to private lenders. These assurances reduce the lender's risk. FHA loans are distinguihed by low down payments, low rates of interest, and wide availability. However, some would argue that the FHA program is skewed toward the buyer. Consider these factors:
Interest: The interest rates for FHA loans are established by law and the rates are usually below the market. Since the lender is concerned with the highest yield, points (a point is 1 per cent of the mortgage loan) will be required at settlement. But, FHA contracts can only "show" the buyer paying one point.This means the seller must either absorb the cost of these points, if any, or raise the selling price.
Appraisals: Before a loan can be approved, there must be an FHA appraisal.It the home does not meet. FHA standards the owner may be required to make "reasonable" repairs. Also, many contract forms have a clause that gives the buyer the option of stopping the sale if the appraisal price is below a set figure.
Loan Size: Legislation before President Carter at this writing would raise the maximum size of an FHA loan on a single-family home to $60,000. If the value of a home exceeds this figure it makes little sense to accept an FHA buyer or to use an FHA appraisal.
Insurance Premium: FHA borrowers must pay a half-point insurance premium for the life of the loan.Between the reduced interest rate to the lender plus the cost of insurance, the total expense may approach or exceed the cost of conventional financing.
Down Payments: With the $60,000 loan program the FHA requires 3 per cent down on the first $25,000 and 5 per cent against the balance. The maximum down payment on an FHA loan is $2,500 - plus settlement costs.
Qualifying a Buyer: While FHA loans may be available there is some question as to who can afford one. The purpose of the FHA program is to expand home ownership, yet because of high interest rates and inflated housing costs FHA loans may not be practical.
Before signing any proposed contract, sellers have a clear obligation to see if a potential buyer can realistically afford such large monthly payments. Look not only to the buyer's gross income, but to the net income after state and local income taxes (which will decline through home ownership), social security payments (which will not), regular monthly payments for a car or credit cards, and other common, recurring expenses.
Peter G. Miller teaches the course, "How to Sell Your Won Home - With or Without a Broker" through the Consumer Information Institute in Washington.