Why 33% of Purchase Transactions are Not Closing Escrow
According to recent figures from the National Association of Realtors (NAR), 33% of purchase transactions are not closing escrow right now. NAR also advises the two main reasons for the contract cancellations are, #1 loan applications are being declined by lenders, and #2 appraisals are not coming in at value to match the negotiated sales price (see below). After discussing these issues with several underwriters this past week, here are some tips that you can use that will ensure your transactions do not run into any problems.
1. Why are so many loan applications being denied?
According to several different underwriters I talked to, the two main reasons lenders are denying loan applications are, #1 the buyer did not qualify for the loan program the lender submitted for approval, as the underwriting guidelines for the particular loan program were not followed, and #2, the documentation sent in on the loan application was not verified upfront. As there are quite a few examples I could elaborate on why the underwriters are denying applications, I will only go through a few of these. For example, the underwriters mentioned that “FHA buyers purchasing condos“ and “Buyers purchasing flipped properties” are 2 types of transactions that they seem to decline more than most. So here are some tips to make sure these two purchase options go smoothly.
FHA Buyers Purchasing Condos
According to FHA underwriters, the majority of FHA transactions that do NOT close escrow are due to one of the following 4 reasons below. If your client is interested in buying a condo & obtaining FHA financing, try and get the following 4 questions answered upfront to ensure the complex will qualify for FHA financing, otherwise when the HOA cert comes in and one of these 4 below are wrong, the loan will be denied.
1. Is the complex currently FHA approved? The complex has to be FHA approved, here is a link to check if a complex is FHA approved or not.
2. What are the owner occupied ratios? Remember FHA needs 50% of the units to be Owner occupied!
3. Are there less than 15% of the units in the complex currently delinquent. The FHA requires that no more than 15% of the units can be delinquent in a 30 day period.
4. Is there any current litigation in the complex? The FHA will not allow any financing in a complex that has litigation.
*Here is a Solution. If a particular complex is NOT FHA approved, then the buyer can qualify for 5% down conventional financing instead. It is a much better loan for the buyer anyway as it eliminates the expensive FHA monthly mortgage insurance, so they will get an even lower monthly payment.
Buyers Purchasing Flipped Properties
Another reason loan applications are being denied, is because the property was a “Flip” and did not meet the qualifications for financing. For example even though Fannie Mae, FHA and the VA have no problems financing flips even if the seller is making >20% in less than 90 days of resale, unfortunately there are Conventional, FHA and VA lenders that will not finance this type of transaction at all.
Some conventional lenders also require 2 appraisals and when one comes in lower than the other this will kill the deal (you must use the lower of the 2 appraisals). *2 appraisals are required on FHA flips where the seller is making >20% within 90 days of resale. So the problem with flips is that some lenders have their own “Overlays” or rules that they apply on top of Fannie Mae, FHA and VA flip rules to help limit their loan risk. So therefore it is very important that the right lender is chosen upfront to ensure it will not run into problems.
Here is a summary of the rules for purchasing flipped properties when obtaining either Conventional, FHA or VA financing, New Rules Buyers and Sellers Must Know About Financing Flipped Properties.
2. Appraisals are Not Coming in at Value?
The #2 reason why 33% of transactions are falling out of escrow right now is because appraised values are coming in below the negotiated price! We all hear about out-of-area appraisers who don’t know the local market, use of distressed-sale properties to appraise a property that is not being sold under distress, and lack of comparable sales. The key to a good appraisal is using accurate comparable sales to arrive at an appropriate price for the property in question.
New HVCC Rules have Created Problems
We all know that Fannie Mae initiated changes in appraisal guidelines in 2009 via HVCC that prohibit mortgage brokers or agents from selecting the appraiser. However, even though the loan officer can’t have direct contact with the appraiser, a real estate agent can. Here are 4 tips for agents to help with appraisals.
4 Appraisal Tips for agents
Here are some good tips for agents to follow when the appraisal is being done on a transaction, that will help ensure the final appraised value is not left up to chance.
1. Meet the appraiser at the property.
The buyers or sellers real estate agent should always plan to meet the appraiser at the property to offer relevant comparable sales information. Make sure you are the contact to schedule the appraisal and then go meet the appraiser at the property and find out if he knows the area, what data is he using etc, so you can ensure that you are giving every chance for the appraised value to come in at the purchase price.
2. Improvement list provided to appraiser
If improvements have been made to the property, or there are features that don’t meet the eye, a list should be provided to the appraiser so they can include this in their final report.
3. Public records are often wrong
The public record is often wrong, particularly regarding square footage. Any documentation to justify a different number should be made available. According to current appraisal guidelines, square footage added without a building permit usually won’t get credit as usable square feet. This can lower the appraised value.
4. When there aren’t enough comps for past 3 months
When there aren’t comps for the past three months, it’s critical the appraiser is provided with the data upon which to make an accurate evaluation, particularly if the appraiser is unfamiliar with the local market.
As appraisers these days now work for the lenders and have no relationship with any parties on the transaction, unfortunately there will be appraisers that do not care what the final value comes in, as they get paid regardless of the quality of their work! Therefore it is important to do what we can to improve the odds that the final appraised value is not left up to chance.
Doing the homework upfront on transactions is key
It is no secret that lenders are changing their rules all the time these days and most would say much too often, one underwriter told me they had over 100 new rule changes to deal with last quarter alone on Fannie, FHA and VA loans. So if a loan officer is not paying very close attention to all of these changes and is not doing thorough homework upfront on the buyers or the property, the buyer can be put into a transaction that will not close escrow.
Your real estate agent and loan officer both have to do their home work you put an offer on a home. If you need help finding either Call my office will we assist finding the right agent or lender so you can avoid these types of issues. Call 760-605-1632
No comments:
Post a Comment