Consider this scenario: You paid off your house a few years ago now you’re selling it for $300,000. You figure that you would make a better return on your money by offering owner financing instead of cashing out and investing the money somewhere else. This is a big part of your retirement, so it’s a very important investment decision.
A buyer is willing to pay your asking price of $300,000. Here’s a snapshot of the buyer’s situation:
- The buyer can only give you $11,000 down.
- The down payment is part of a $17,000 gift received from the buyer’s parents, the remainder of which will be used to pay closing costs. The buyer has no savings outside of that.
- The buyer has marginal credit with a credit score of 620 and had a couple 30-day late payments on credit cards just over a year ago when they had some unexpected car repairs.
- Based on conventional lending guidelines, the buyer has just enough monthly income to make the mortgage payments.
- The buyer has been pre-approved for an FHA loan (assuming a seller contribution toward the buyer’s closing costs), but they figure they can save on some of the closing costs and FHA insurance costs by going with the seller financing.
- The buyer loves the house, wants to live there forever, and assures you that their mortgage payment will always be the first check written every month.
Based on that information alone, would you do the deal? FHA would. I would not.
Let’s look at the statistics. Edward Pinto, a former Fannie Mae chief credit officer, recently testified before a House panel that that an estimated 20 percent of FHA’s entire portfolio will end up in foreclosure, which was also supported by estimates that FHA provided to Congress. That’s one in every five loans.
If you have to foreclose, you could be looking at $15-$20,000 in legal fees and lost interest, not to mention that you may have to make repairs before putting it back on the market, and if the market has declined, you would lose more money in the form of a lower selling price.
Why do we expect our government to take financial risks that we’re not willing to take ourselves? Is it because it’s not money? Well, it is our money. And if we don’t support responsible lending, we’ll end up bailing out the FHA program as well. Adding to our national debt to bail out FHA will lead to higher taxes, which will lead to less disposable household income, which will lead to less available money for home purchases, which will lead to declining housing prices.
Instead of blaming the government for damaging the housing market because of the more stringent FHA rules that were announced, perhaps we should be thankful that a low down payment program such as FHA exists at all.
Authored by David Monroe, Realtor and Pre-Foreclosure and Short Sale Specialist.
Access Seattle area short sale help and foreclosure resources including selling in foreclosure, and 8 Ways to Avoid or Stop Foreclosure.
Copyright (c) 2010 by David Monroe (Home4Investment Team at Keller Williams Seattle Metro West).