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October 15, 2014

FHA Loans Lay Low in San Francisco

Buyers making purchases with FHA loans are a rarity these days in San Francisco. In the past two years, FHA loans were used by only 54 single-family home and six condo buyers, as per the SF MLS.

An FHA-insured loan is backed by the U.S. Federal Housing Administration, which insures a loan made by a private lender. Buyers can make a purchase with a very low down payment. FHA loans are a bit more complex than regular loans, and typically take longer to process.

The San Francisco market moves quickly, and many sellers don’t want to wait any more than 21 or 30 days to complete their transaction. Many buyers also have large down payments these days and make offers that frequently omit loan contingencies. So it’s no wonder that in a competitive offer situation (nine times out of ten), a seller will go with the buyer that presents the most direct and efficient path to closing. And that typically will not involve an FHA loan.

When it comes to condos and FHA loans, there’s virtually no activity these days. That’s because in order to get an FHA loan on a condo purchase, the entire building/HOA has to be approved by the FHA beforehand. Though there were a number of buildings approved over the past few years, that approval has expired. One of the main reasons is because the owner occupier-to-rental ratio exceeded FHA guidelines—a product of the “down” market, when many condo owners decided to rent out their units until the market improved. So getting an FHA loan on a condo depends on renewing approval of buildings that may no longer meet FHA guidelines, or obtaining approval for previously unapproved properties. In either case, we’re not talking about a fast process.

The one thing properties purchased with FHA loans have had in common is a longer days on market (DOM). For example, single-family homes spent an average of 42 DOM from January 2013 – October 2014, which means their buyers were most likely not in multiple-offer situations. The most common neighborhoods where buyers used FHA loans were Bayview, Excelsior, Visitacion Valley, Portola and Silver Terrace.

But rest assured that when the market changes, buyers may turn to FHA loans again. Two of my clients successfully purchased a home in late 2013 in Crocker Amazon with an FHA loan. They were able to put a low down payment toward the house, which freed up some of their cash so they could complete a renovation. We managed to prevail in a 19-offer situation. So you never know what’s possible, and like my clients, you can be a little creative.

The bottom line is that FHA loans are out there and can be used in San Francisco. My advice? Strategize before you hit the house hunt. With a plan and some foresight, you’ll be successful.

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