Our seller’s market is leaving people behind. As houses across the country sell above asking, a whole group of borrowers are seeing their offers rejected despite solid pre-qualification, simply because of the program they’re using. These borrowers, many of whom are first-time homebuyers, are left with few options and require the dedicated service of mortgage professionals to get an offer accepted.
Those struggling borrowers are using FHA programs. According to Yury Shraybman (pictured), broker at Innovative Mortgage Brokers in Philadelphia, FHA borrowers are at a serious disadvantage in today’s market. He attributes that in part to their somewhat lower credit scores and the likelihood that they have less in assets than their conventional-qualifying counterparts, but also to a degree of stigma among sellers and selling agents when they see offers come in with an FHA pre-approval letter. To counter this stigma Shraybman, whose pipeline is roughly 30% FHA loans, relies on his own diligence to get his clients’ offers accepted.
“The idea that they’re not qualified borrowers,” Shraybman said, when asked what potentially unfair stigma FHA borrowers face. “A lot of the time they’re just as qualified as a conventional borrower, they’re just qualifying under a different program. A lot of the time people think that an FHA borrower has a lower credit score, but those scores are still workable within the program. The FHA lenders I work with, for example, have a minimum credit score of 620.”
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He accepted, though, that even if the credit score is akin to that of a conventional borrower, FHA borrowers don’t have the accreditation that comes with an automated underwriting process conducted for conventional loans. He explained that looking at credit, DTI, and other underlying factors will show that a conventional borrower is a stronger overall borrower, but the FHA program is specifically constructed to make the home affordable for that less-advantaged buyer. The problem, now, is that with the market so tight, sellers can follow where their bias and market factors might lead.
A significant hurdle FHA borrowers are now facing, Shraybman explained, is the appraisal gap that comes when a home sells for more than its appraised value. In an FHA loan, the appraisal is pegged to the property, rather than the individual, meaning that if an FHA borrower gets an appraisal and then walks away from the deal, the seller is stuck trying to offload the house with an obvious appraisal gap. It’s not an uncommon scenario as FHA borrowers often have less assets and may not be able to cover any appraisal gap that would normally be paid out of pocket.
Despite these challenges, Shraybman works closely with FHA borrowers and still encourages many on the low-end of conventional qualification to try an FHA program. He does so while educating them about the challenges and how today’s seller’s market has exacerbated the difficulties they may face. In that early education process, Shraybman makes sure his borrowers know that he’ll go to the wall for them and advocate for their offer.
One of Shraybman’s services, he said, is a conversation with the seller’s agent. He asks his borrowers connect him with the listing agent so he can talk to them about the strength of the borrower. He can explain why they might be better qualified though an FHA loan and why their underlying picture is stronger than the big letters FHA might imply.
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Shraybman attributes some of the stigma associated with FHA loans and borrowers to the sheer quantity of call-center mortgage originations out there on the market. He sees lots of clients walking in with pre-approvals, both conventional and FHA, from a call-center LO with a year’s experience. He knows those loans are going to fall apart come closing, leaving everyone with a bitter taste in their months about the borrower and the program they used. Shraybman’s approach is to be as diligent as possible with his borrowers, explaining exactly what they are qualified for and what they can afford based on a range of numbers beyond just their credit score. He looks at bank statements, W-2s, and pay stubs to get a full picture of the borrower. It’s an approach that takes time and work, but Shraybman believes that if other mortgage professionals want to help FHA borrowers in a tight market, they need to work just as hard and advocate for their clients.
“I think sellers and their agents should be looking at the FHA pre-qualification they same way as they would look at a conventional pre-qualification,” Shraybman said. “They should be doing a little more due diligence, reaching out to the loan officer to see the qualify of this borrower…Instead of listening to these stigmas, I use facts about the borrower. I think real estate agents should be doing some due diligence on the loan officers, too. They should make sure that this is serious and not a pre-qual that was put together in the spur of the moment to add volume to the pipeline.”