Last week, I stood in the long line at the Phoenix Sky Harbor security checkpoint like a lamb being led to slaughter. The short line, the one that guys in fancy suits get to use, was strictly forbidden because I didn’t know the secret handshake. I also lacked preferred silver diamond elite status.
I boarded the plane with the Zone 5’ers and passed by the first class passengers as they sipped their free booze and closed multi-million dollar deals on their smartphones. Worse, these stuffy elitists refused to make eye contact with me as I made my way to coach, where I would go to suffer with the rest of the commoners for the next three hours.
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Then it dawned on me as I took my middle seat in aisle 27. I’m a 2nd class citizen of the air travel world.
In case you haven’t heard the news, the greater-Phoenix area is a seller’s market again. Inventory levels are down and prices are up. Cash buyers accounted for 40% of all sales in March. And this new phenomenon has turned FHA loan approved buyers into the 2nd class citizens of the housing market.
For starters, FHA loan approved buyers have very little, if any, cash to put down on their home purchase. In rapidly appreciating markets like Phoenix it’s difficult for appraisers to keep up with values. If you’re a home seller or fix and flipper like me and are under contract with an FHA buyer what happens if your house doesn’t appraise for the offer price? You either lower it to match the appraised value or put the house back on the market. Neither option is very attractive.
If you’re a home seller and are under contract with an FHA buyer and the house does appraise you’re still not out of the woods. The FHA requires a second appraisal, usually ordered about 5-7 days prior to closing. The FHA honors the lower of the two.
Then there’s the inspection. The FHA has a laundry list of stuff that must be done in order for them to approve a buyer’s loan. Last year, I flipped a house to an FHA approved buyer that didn’t ask for any repairs. After the home inspection was complete the FHA came back and required I fix a bunch of stuff – to the tune of $1,500. Even worse, they had to send the inspector back at my expense to verify the items had been corrected, which pushed out the closing one week.
This is why many FHA borrowers are getting squeezed out of the market. They are the last people a home seller wants to deal with. Sellers here know that over asking price offers likely won’t appraise. The only way to get a deal done is to find a cash buyer, or a conventional buyer with enough cash to cover the difference if the appraisal comes back low.
So if you’re an FHA approved buyer what do you do?
I recommend you put more money down. That lets the seller know you can at least make up some of the difference if the appraisal doesn’t match the offer price. If you don’t have any money to put down then save some and buy later. Homeownership is not a life or death proposition.
The alternative is you get treated like a 2nd class citizen. But take it from me; it’s not that bad. Just be prepared to wait in a long line before finally getting to your seat.
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