We just closed on a $460k purchase using FHA. It is a new home so it probably doesn’t apply to a lot of the situations you are describing above. Other than having to document every bank deposit for 2 months and doing a gift letter for a $1000 xmas check from my mom, it was relatively painless. We took 60 days but the house wasn’t finished yet. My impression was it wouldn’t have taken this long otherwise. The appraisal happened to be about $1k over the loan though.

Your advice on #2 is seriously flawed and is reminiscent of how we got into this mortgage mess. If properties are falling through because of FHA appraisals not making the mark (from this *overbidding*), how do you justify the overbidding and subsequent price increase? Low-down-payment-buyers generally do not have any skin in the game (down payment) so they try to finance the additional cash, not looking at the actual price they are paying for the house. Hence prices go up and up and up, until the price reaches absurd levels (ex:2006). Overbid with an FHA loan if you can cover the APPRAISAL GAP. These FHA OVERBIDDERS are doing everyone an injustice by tying up the property until the appraisal falls through and they have no cash to cover. We are still in a declining market, and with the foreclosure moratorium over and the banks resuming the foreclosure process, we can expect a lot more REO’s to come into the market.

Overbid all you want with your FHA loan, but don’t go crying when the appraisal comes in lower and you have no cash to cover. Property back on the market and the cycle starts all over again…

@Ron, thanks for sharing your experience with us. I’m glad the process wasn’t too cumbersome. We were surprised to hear that some sellers were looking askance at FHA loans.

@Chris, I agree with you so far as the FHA taking care to avoid loans on inflated properties, and in fact wasn’t quibbling with more stringent standards from the FHA regarding appraisals. Having said that, I do think it’s worthwhile to note that some sellers seek to avoid working with buyers funded by FHA loans for fear that an FHA loan may not fund or may not fund on time. That is an entirely different question than whether the fear is reasonable, and also entirely different from the question of whether the loan should in fact in fund.

“….Again, we like to call the listing agent to see what has come in, and to hold off on making our offer until we’re right at the deadline, so our client has the most info.”

Oh really? The listing agent will tell you what has really come in so a client can make a well-informed decision on how much offer? News to me!

@Glenn – Let me start by saying that I like Redfin, and I enjoy your blogs. I have not worked with Redfin agents, but I think the site is simply top notch. The search functionality is superior, first-class information and very refreshing for the real estate community. This is EXACTLY what people need to make informed decisions.

This is a very informative article. My issue is the added marketing color. I see the article as encouraging overbidding with an FHA loan, and I think that is wrong.
In short, If you have an FHA loan, you may be in a weaker offer position due to the FHA process. An even weaker position if you are asking for 3% closing costs. And even weaker if you have no cash for closing. You can try to overbid, but run the risk of the property not being able to appraise, and the loan falling through.

An agents responsibility is to provide a *SERVICE*. Not “close a deal”. A lot of people are uneducated to the home buying process, and they rely on their “agent” to provide guidance, not *sales tact*.

Let’s start giving ALL of the facts, and create a better, more educated Redfin community. This will sell itself.

An agents responsibility is to provide a *SERVICE*. Not “close a deal”.

Well put Chris. Great comments.

Chris, you’re right. I’m the guy who writes the Redfin Advantage report every year, summarizing MLS data on how we negotiate a lower price for our clients. And I’m a huge advocate for how we compensate agents based on customer satisfaction from surveys, rather than commissions.

So I couldn’t agree more that an agent has a fiduciary responsibility to help you do what you want to do, not close a deal. A lot of times, the best advice is to walk. It drives me crazy that agents don’t often give people that advice.

That said, I think it’s a fact that when two buyers come in at the same price, one with an FHA loan and one with a conventional loan, the buyer with the FHA may now be at a slight disadvantage with some sellers. From there it follows that if you want to win the property, you may have to bid more. Whether you should or not is up to you. If in beating out another buyer, you over-bid — that is pay more than the property is worth to you — then you shouldn’t. I am not sure what advice to give people with FHA loans going into competitive bidding situations — which is what we’re seeing almost exclusively on East Bay REOs, which so far have been some of the best values in the Bay Area market.

I probably shouldn’t have said anything. To your point, next time, I’ll let people draw their own conclusions; I’ll cross out the advice this time. But the last thing on my mind when I wrote this was trying to get more people to buy houses; our market-share is tiny so there’s not value for us in trying to influence the overall market. The reason I wrote this was:
a. I’m compulsively interested in the topic, and like writing about it… and
b. I want to establish Redfin as an authority on what’s happening in the market — because of our deal-flow — so that when people do want the service of an agent, they use Redfin, for precisely the reasons you describe (service not sales pressure).

@Keith, I agree with you too. We all know info from the listing agent should be taken with a huge grain of salt. But consider this example. I was sitting next to Redfin agent Miawand Bayan the other day when he had a client bidding on an REO that was going for way over asking — the bank intentionally auction-priced it — anyway the client really wanted the house for very particular reasons, and so Miawand and the client decided to wait until close to the offer deadline so they could size the situation up as best they could. One piece of information was what the listing agent was saying about the offers coming in — it may have been total BS and we said as much, but the client wanted to know and I would have too if I were them. That situation is better than the one we faced a few years ago when listing agents would tell their buddies exactly what it took to beat a Redfin offer. Our goal is to give clients what info we can get — however imperfect — so they can make the best decision.

Well said @Glenn

This kind of transparency and journalism is what makes Redfin stand out from the run-of-the-mill and ex-stripper-just-passed-the-real-estate test advice that is out there…

Redfin is revolutionary to the business… keep it up! this is how it should be…

“Intense competition” and “demand is way up” are your two observations from the “past few days”? Hmmm, do you have observation with a longer time horizon…and perhaps some more information on the basis point that these barometers of the market are based upon?

[...] are using FHA-backed loans, but we’ve lately noticed in the Bay Area and Los Angeles that sellers are avoiding deals based on FHA loans, because they don’t want to jump through extra hoops to close the [...]

[...] Are Sellers Avoiding Buyers Using FHA Loans? | Redfin Bay Area … [...]

Interesting reading a month or two down the road. I’ve been home shopping in the Gilroy area for a few weeks now, and the competition is intense. The prices are consistently set below value, and nearly every property under 500k is a bidding war. Open houses are generating 20-30 bids. The phenomenon described above is most certainly true, if you have an equal or even slightly higher offer on a REO that’s FHA, forget about it.

Not sure what to do at this point. Overbid and risk a house not appraising. Pull out of the market until I can afford 20% down.

A fascinating number would be the number of homes sold to conventional loans vs. FHA loans compared with the number of offers that are FHA vs. conventional. While seemingly offering the ability to buy a home to someone like me with a secure job with a great salary, but lacking the down payment money for a conventional loan, the program seems somehow flawed. I’ll end up paying significantly inflated rates and putting a lot more non-principal money in up front, and that’s if I end up finding a seller desperate enough to wait 60 days for closing. Going to have to seriously re-think this.

As a seller??? Avoid FHA mortgages!

I have been waiting for months to close and lost over 5k in the waiting process because of how ridiculous things have gotten… and I’m not the only one – the real estate company admitted that one FHA situation after the next is killing deals left and right… and NO! not exaggerating From the smallest crack to the addition sunroom – inspected, re-inspected and hilarious – I had to wait a week because they didn’t review the survey – which showed the sunroom on solid concrete – they thought it needed to be ventilated the “crawl-space”… OMG no one will put their name on the papers anymore – cause they are afraid – FHA is a JOKE! I did my homework doubters!! I have a list of 10 other individuals and couples who are sellers…

Funny though – the real estate company stills gets their money, the lawyers and the banks! amazing – the sellers lose MAD money… go figure..

Mike B

My realitor and I have submitted 8 offers over the past two months and still no acceptance, now my realitor is thinking it’s because it’s an FHA loan, I don’t have a high enough credit score for a conventional loan but have money sitting in the bank, not sure what to do? Any advice?

Hi, I just wanted to weigh in my experience as an FHA buyer. I am extremely disgruntled and have experienced serious discrimination being an FHA buyer. I actually had a listing agent tell me today that my FHA loan is no good in his town, and to go look elsewhere! I have been mainly looking in the Castro Valley area and have now officially given up. I am wondering, HAS ANYONE BOUGHT A HOUSE WITH FHA in East Bay? If so, where and was it from a normal seller?
Thanks,
East Bound and Down…

Hi Jackie, I talked to someone at my work who said he bought a house in Hollister with an FHA loan, but it was like the 12th offer, and he also told me that his offer was second in line. He said the only reason he got the house was because the person who got the house lost his job and his realitor found out from a friend, so his realitor called the realitor and said that his client was second in line and that he had to honor his client and he got the house. It’s a crazy market out there right now.

Buying a home in the San Francisco Bay Area with an FHA loan is definitely possible. Your buyer’s agent, listing agent, and seller need to be on the same page. There is no reason for your FHA offer to be ignored as long as all parties are very well-informed about the process and whether or not the property will be acceptable for FHA financing. It is a shame to hear that sellers whose properties are not acceptable for FHA have such a bad taste in their mouth with long escrows that should have never begun. A little homework in the beginning can save everyone in the process headaches.

Hey if you can’t get pass FHA home inspection, you might seriously want to reconsider passing on the house. The fact is the house has issues. You can say that FHA is strict but it is that way for a reason ~ AKA to protect you the investor from getting milked.
FHA loans did not cause the bubble. Dumb home owners who “fell in love” with their homes and overbid for it did. If you live in the bay area you would know that nothing less then a Combo loan or a huge down payment will get you the house back in the boom days. Folks should thank the agents and their brother in law the appraiser for the big mess.

My wife and I were just turned down for a bank-owned REO home because we are using FHA financing. Our offer was $10,000 over the offer they accepted. The reason given was that we were not using a conventional loan. So far that is the 5th time this has happened! It’s extremely frustrating and we simply don’t know what to do to buy a house. This house and all of the ones that we are offering on are less than 8 years old and are all in great condition. So passing inspection isn’t the issue.