|Why You Should Know About FHA Lending Limits
The subject of this article is very important to the investor who wants his rehabs or flips to have
the largest possible pool of potential buyers. While I do invest in houses of all price ranges, I have found
it easier and faster to sell homes that fall within the FHA lending limits.
FHA loans are designed (and guaranteed by our government) to encourage home ownership for buyers with
limited financial resources and often imperfect credit. There are several programs floating around that will
actually let you get into a house with an FHA loan for nothing down. Again, I want to make the point that
nothing down is easy in the present day and age, finding the deals is the hard part. Your mortgage broker
would know about these, as they are national in scope. The credit score is not nearly as important with
FHA (or VA) homes as with conventional loans. In general, the underwriting requirements are easier than on
a conventional conforming loan, and the closing costs are extremely low. Borrowers can qualify with minimal
The drawback of FHA loans is that the homes sold must meet FHA standards, which means that the appraiser does
not want to see any deferred maintenance due on the property. If you are selling a beaten up house, you
should be careful before accepting an offer in which the buyer plans to obtain FHA financing. You may have
to make some repairs, at your cost, to get the house up to the appraiser's standards. In the next article
(The Average Appraisal and the "Flip"), I discuss the requirement in most owner-occupant loans that
the property be in "average" condition. The FHA requirements are generally stricter than this
requirement as a rule of thumb.
"I heard that FHA loans are terrible from the Seller's Perspective . . ."
There are opinions about FHA financing that range from good to bad from the seller's perspective. Many of
the bad opinions concerning FHA loans arose under the old way that these loans were set up. Under that
system, there were requirements for the types of finishes that would be inside the house. You have probably
heard the expression "FHA grade carpet or vinyl." FHA required that the carpet be of a certain pile
if they were going to do the loan.
In lieu of hypotheticals, I can give you some real examples of deals done with FHA lending. An investor who
works in some of the same neighborhoods that I do recently sold a house to a buyer who obtained an FHA loan.
The FHA guidelines as quoted by the appraiser required my investor friend to erect hand rails off the back
steps, put in gravel for a driveway, put screens on all the windows, and fix numerous other small items. My
most recent FHA sale had no requirements (it was on a total rehab), the one prior to that required splash
blocks under the gutter downspouts. Another house I sold FHA required that a screen door be fixed. Not a big
deal. These are really aggravation items, but nothing that could break a deal.
Side-Note: VA Loans generally require the house to be in excellent shape. When our family business was
building new homes, many of these were sold VA in some sub-divisions that we developed. VA put numerous
requirements on the properties before they could be conveyed, and made demands that really verged on cosmetics.
Recently, my wife's family sold a home, and the seller sought financing through a VA lender. The only
requirements they were given were to clean ants off the electric meter and turn up the hot water temperature.
Strange, but no big deal . . .
If you are selling homes that are in generally good and clean condition, you have nothing to worry about.
How This Relates to Choosing Your Target Neighborhood
FHA loans are important to think about when you are beginning your real estate investing career. When we
select a neighborhood to invest in, one thing for us to consider is whether or not we could rehab the property
and sell it via an FHA loan. FHA has a maximum amount that they will lend in each given area, or county. This
amount is moved up or potentially down to reflect the actual cost in an area for acquiring a fairly nice
property. Thus, in my county, which is metro-Atlanta, we have a much higher limit than in a more rural county
with lower housing values.
Many people just cannot qualify to buy without FHA, and if we shut them out with a higher priced property, it
may take a little longer to sell our home. If you are selling your home within the FHA limits, you also know
that you are right in the thick of the market.
Thus, if you are trying to decide on two different areas to invest, and all else is equal, go with the area
where you can market your properties within the FHA financing price limits. Another advantage generally on
dealing with this type of buyer is that they often are younger buyers who do not intend to stay in the house
forever. You can thus market smaller properties to them (though I prefer 3 bedroom homes!), and properties
that are neat and clean but not trimmed out expensively inside. They are probably coming from an apartment,
so the house will seem nicer than where they have been.
David Whisnant is a licensed real estate attorney in Georgia. He received his B.A. from
the University of North Carolina at Chapel Hill, and graduated from Law School at The University of Georgia
School of Law in Athens, Georgia. He is author of the
"The Complete Real Estate Investor
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