Hello, LOs, and happy Friday!
I remember early in my mortgage journey wondering if I should go with a conventional mortgage or an FHA product. On the surface, the FHA mortgage products seemed like a good fit. I could put in a much smaller down payment and still achieve a rate in the low 3s.
It soon became clear that conventional was the way to go. "If you want to buy that house, I think your chances are better with a conventional mortgage," my LO told me. He was right. Reading all your horror stories about FHA lenders getting ignored and laughed at has been eye-opening.
So let's talk a little more about the discrimination FHA — and VA — borrowers face in today's purchase market. Dozens of LOs told me FHA and VA are well-intentioned programs that simply aren't helping people anymore.
"We have a VA customer refinancing — they bought their home two years ago without issue, and the pest inspection on their home revealed some boards with minor wood rot, but since noted as a 'section 1' item on the pest inspection, would need to be repaired prior to moving forward," said one production manager in California. "AKA it's cash out of the veterans pocket OR they don't get the refi, when they could get a conventional loan without issue."
He added: "When I bought my house last year, there was also some minor wood rot noted. Now that I'm selling, I'm aware it's still present, and since I know that, I'd be FAR more likely to accept a conventional offer than a VA offer — as much as I'd love to see a level playing field for vets, it simply doesn't exist due to the differences in appraisals and home maintenance required to obtain these loans — like so many other well-intentioned government programs, they end up hurting those they're trying to help."
One LO in Texas told me that FHA and VA borrowers are "absolutely discriminated against" in highly competitive markets.
"I originate largely in Austin, Texas — which has been absolutely insane for the past seven years with extreme price/market competition really hitting overdrive with the pandemic," she said. "One-hundred percent the biggest deterrent for FHA and VA loans are the more restrictive appraisal requirements. ALL my agents ask me if I can cross-qualify my borrowers with conventional as well as FHA, because, frankly, FHA offers are not getting accepted anywhere in the Austin core geographic area and are hard to be accepted in any of the outer suburbs."
Unfortunately, she said, FHA appraisals are seen as more restrictive, requiring somewhat "bullshit" cosmetic repairs, much like VA loans.
"I once had an FHA appraiser require that ALL exterior windows on a flipped 40-year-old old house be completely removed/repaired to make a value — an obvious expense the seller would not undertake and thus the contract was canceled," she said. "The exterior windows were perfectly functional — they opened and closed and had air and water seal, but the appraiser was concerned because he saw 'evidence of rotten wood' on the window panes which had already been addressed with sealant and paint. Why the hell was the appraiser getting into the cosmetic as opposed to functional purpose of the windows?"
The LO also said she'd seen FHA appraisals come back refusing to value open shelf cabinets or polished concrete as completed features: "W-T-F" was her reaction.
"VA are entirely worse — the 'approved' appraisers take forever, have no accountability, and think they are helping the veterans by requiring a laundry list of repairs, when really, the vets are having to cancel the contract due to seller not wanting to make — let's be honest -— most cosmetic or esoteric repairs, like the handrail installation and again, exterior wood weathering. In this market, you are lucky to have a VA loan close in 45 days (the standard is 30 days, period) because the appraisals take so long and inevitably require a wildcard list of stupid repairs."
Lower-income borrowers are effectively shut out of this market, she said, and pushed out to exurbs "due to the competitive inefficiencies of government loan programs."
LOs, I'd love to hear more from you on how often you experience issues like this. Are cosmetic repair requirements shutting out your clients from buying a home? Please share your stories with me by emailing jkleimann@housingwire.com. And I hope you have a great weekend!
James Kleimann
Managing Editor, HousingWire
EmoticonEmoticon