FHA LOANS: A WARNING AND REMINDER

February 17th, 2012 at 6:49 pm

I received a call this week from a listing agent on a deal where the buyer had contracted to procure an FHA loan. The agent was upset because, weeks into the escrow she received an escrow amendment memorializing two FHA requirements that, in her view, changed the terms of the deal. Of course, her seller didn’t want to sign the amendment and she called me to find out if he had to. Unfortunately for our agent and her seller, the FHA requirements at issue were not unique. Rather, they are uniformly enforced whenever an FHA loan is used. As a result, by checking the FHA box in paragraph 3C(1), the buyer was impliedly telling us that these requirements were part of the deal and the seller was accepting them. So, I think that the amendment was already agreed to and her seller could not eliminate those changes by refusing to sign.

So, what were the terms that caused so much stress.? First, in an FHA deal, the seller must agree that the buyer will not be obligated to close and will not lose their deposit unless the property appraises at purchase price. In other words, regardless of what contingencies exist in the RPA, and whether they have been removed, the buyer does not have to close escrow if the property doesn’t appraise. The FHA gives the buyer a second appraisal contingency that lasts until closing.
Next, the FHA will not insure a loan unless any items or systems identified by them are repaired. Of course, the RPA specifically says that the seller doesn’t have to pay for those repairs. However, if they are not made, then the buyer has a right to get out of the deal. Further, unlike normal repairs, the buyer cannot waive them. The FHA will not insure the loan unless the identified items are fixed.

So, if you represent a seller who gets an FHA offer, make sure to explain these issues to her. By accepting that offer, your seller is accepting the express contingencies of the RPA, as well as these two required by FHA. By explaining them up front, at the time of the offer, you won’t have to worry about a problem later on. That, of course, is always the best way to proceed.

As always, please contact us with any questions you may have

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