Did you know that if a FHA seller sells their home early in the month, they are charged interest through the rest of the month by the FHA? This is a fact that not a lot of sellers are not aware of because it is only the FHA that calculates interest on a full months basis, whereas conventional loans etc only calculate the interest through the closing date. This is why it is recommended that all sellers who have FHA loans should have their contract scheduled to close at the end of the month, so they can put as much money as possible in their pockets from the sale.
The FHA is overcharging sellers
Let’s say for example, a seller pays off a $400k FHA-insured mortgage on April 5th and the seller has a 5% interest rate, the seller will be charged an extra $1640 in interest to cover interest through the remainder of the month. By scheduling the contract to close at the end of the month, this will put that $1640 back in the sellers pocket.
Quite frankly how the FHA are calculating this interest is just wrong! Many sellers today are already trying to squeeze minimal profits from their homes, and these profits are rightfully theirs. But as the Govt and FHA need every penny they can these days, this is a huge source of income for the FHA if you consider they do this on every transaction, in fact they are raking in over one Billion dollars a year alone through this program.
Supposedly the FHA are looking into this and are exploring methods to move to a per diem method that everyone else uses, I have a feeling this “change” will probably take a while. But considering the technology that is available out there today, I am sure someone could figure this solution out with the stroke of a keyboard.
This is why FHA homeowners who do a FHA refinance will always be advised to close at the end of the month, so they don’t get charged double interest. So make sure your FHA seller too is aware of how the FHA will calculate their payoff on their home and recommend an end of month closing, so they can put as much money in their pocket when they sell their home.
4 Must-Ask questions for Buying or Selling a Condo with FHA
I probably get asked the following question as much as any other question, “what are the FHA requirements for a FHA buyer to get financing on a condo”. If your client is interested in buying a condo and obtaining FHA financing, it is a good idea to make sure you have the following 4 questions answered upfront to ensure the complex will meet HUDS minimum standards and qualify for FHA financing. Otherwise it is risky going into contract and waiting for the HOA cert to come back a week or two later, because most of the time just one of these issues below may kill a transaction.
1. Is the complex currently FHA approved? use this link to check https://entp.hud.gov/idapp/html/condlook.cfm If the complex is not FHA approved it will not qualify for FHA financing.
2. What are the owner occupied ratios? Remember FHA needs 50% of the units to be Owner occupied!
3. How many of the units are delinquent on their HOA dues? The majority of lenders require that less than 15% of the units be delinquent. FYI, I have a couple of lenders who will accept more than 15% HOA delinquencies as long as the other 4 questions come out positive.
4. Is there any current litigation in the complex? FHA will not lend if there is any litigation in the complex.
Doing the homework upfront is critical
Getting these 4 questions answered ahead of time will save everyone a lot of time and hassle on a transaction. Many of the underwriters I talk too are advising that they are having to decline a lot of FHA files because one of these issues above pop up when the HOA cert comes in from the condo complex.
Myself and my assistant always do as much homework as possible upfront with our condo buyers before they go into contract, as we want to make sure we have all 4 questions answered above. Doing this homework just ensures that the transaction will close escrow. There is nothing worse for everyone involved, than working on a transaction for months helping a buyer find a home and getting them into contract, only to find out a few weeks later they do not qualify for the loan.
If you have any questions about any of this information above, please feel free to contact me directly at 858-442-2686. I look forward to chatting soon