FHA To the Rescue? Savior or Sham?

When, as part of the Economic Stimulus Package, it was announced that the FHA would raise their loan limits, members of both the housing and the banking industries rejoiced.  With the tightening of lending regulations (some justified, some an over-correction) this would help “free” up money and stimulate home buying.

Like every other real estate agent across the country, I was faced with the task of (re) learning the rules of FHA mortgages…but it was a relatively easy task because opportunities abounded for refresher courses.  Even with the initial uncertainty of the amount of the rate increase (which was determined by regional economic indicators), lenders went into high gear and provided as much information as possible.  In the Washington, D.C. area we were thrilled when it was announced in early March that our area would benefit from the maximum loan limit of $729,750.

At the end of March, I listed a property in Silver Spring for $515,000.  The owners, clients who I had been working with for over a year and a half, had contracted on the house of their dreams in Bethesda.  The contract was not contingent on the sale of their Silver Spring home, but they were counting on those funds to pay off a home equity.  The Silver Spring house had the “wow factor” that we need in today’s market – a first floor kitchen/family room addition that was just spectacular.  In addition, the sellers had done everything right in preparing their home for sale.  They had decluttered and spiffed up -- and generally turned their lives inside out to make their home sale a priority.

The first open house resulted in a buyer and a ratified contract at full price with a 1% seller contribution.  The prospective buyers, both military physicians moving to the D.C. area from the Midwest, had initially wanted to finance their purchase thru an Atlanta bank that was still giving 100% financing to physicians, but their agent thought this was risky and encouraged them to go FHA.  That’s when the nightmare began.

To make a very long story short, the FHA appraiser initially gave a verbal of $450K (remember this was a $515 sales price) and later admitted to a mistake which brought his appraisal to $465K, a mere $50K under sales price.  Both the buyers and the sellers and the agents and the lender were furious/perplexed/confused.  The good news was that the appraisal was so ridiculously low (his #1 comp. was a home on a very busy street that needed substantial updating) that all the principals banded together against the appraiser…which did no good.  An “official” appeal was prepared and quickly turned down…and the “bad” appraisal would now stay with the property for 6 months.

The light at the end of the tunnel was the Atlanta lender, who still said that he could do 100% financing as part of a physicians’ loan program.  A new appraisal was ordered and it came in at full price, $515K.  There were some tense moments and sleepless nights for a lot of people, but the property settled this week and both buyers and sellers are thrilled.

Was this just a single bad appraiser or is the FHA looking for ways not to give loans? The fact that another appraiser could find justification for the sales price makes you wonder.  Only time will tell if this program, meant to stimulate the buying process, is going to be successful.

Contributing Blogger - Gretchen Koitz

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