Just like the Camaro, FHA is popular again in Arizona. And with FHA reform around the corner, it may take an even bigger bite out of Fannie Mae and Freddie Mac. So what's all the excitement about? You still need a fairly clean credit report or some compensating factors to qualify for an FHA loan. Also, the FHA rates can be less competitive and there is mortgage insurance, even with 20% down payment. For me it's not about credit or rate and I'll explain why.
In this buyer's market, the knee jerk reaction is to negotiate lower purchase prices. Reducing list prices or presenting low offers becomes a chain reaction that disrupts values in an otherwise stable neighborhood. In a case where the purchase price is reduced, the equity disappears, even if the appraisal comes in higher. Subsequently, the average price level in a neighborhood drops based on the most recent sales comparable. So how can we slow or stop this downward spiral?
By utilizing FHA approved Down Payment Assistance (DPA) programs, a seller can make a more attractive counter-offer rather than just dumping the price. Here's how it works. By working with the buyer's mortgage broker, a DPA program acts as conduit for a seller-paid gift of equity. The gift of equity can be up to 10% towards the down payment of the home. When a gift of equity is provided, the purchase price can remain as the list price. This keeps the property values higher, despite having a few desperate sellers in the neighborhood.
For the buyer, using a DPA means they can afford a more expensive home or potentially qualify for a home normally unavailable to them. Also, the instant equity can help buffer against further value reduction in their area. In addition, the FHA allows a 6% seller contribution towards closing costs. The 6% can be used to pay 'points' that reduce the mortgage interest rate and the buyer's debt-load. This greatly improves a buyer's chance of qualifying for a home.
In new neighborhoods where a builder is stranded with 'spec' homes, utilizing a 10% DPA program and a 6% contribution towards loan closing costs is a viable alternative to price slashing. There is nothing more disappointing to a new homeowner than having a builder stage a fire sale in their neighborhood.
If you are a FSBO or a real estate professional, here is the proper wording to be used on a purchase contract involving both a DPA gift and a seller contribution towards closing costs:
"Seller agrees to pay 10% of the sales price through the AmeriDream Down Payment Gift program plus a processing fee of $375. Seller further agrees to pay an additional 6% of the sales price which is to go towards the buyers closing costs, pre-paid finance charges or reserves."
Variations of the gift % and the seller contribution % can be negotiated but cannot exceed the figures above.
With basic understanding of how to leverage DPAs and the FHA guidelines, property values can remain more stable and more buyers can be qualified for a new home.
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