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Vogel: The FHA Mortgage Process

Richard M. Higgerson
Four Seasons Sotheby’s International Realty
FHA conditions included repainting some of the exterior boards and documenting the design of the septic system.

In recent dealings with the Federal Housing Administration or FHA, I am reminded that ten of the most feared words in the English language are: “I’m from the government and I’m here to help you.” The flagship FHA mortgage insurance program was designed to help families, especially first time home buyers. Although anyone can apply for an FHA insured loan, it must be for a primary residence and the loan amount is capped at 115% of the median home price in the area.

FHA insured mortgages offer a number of advantages over conventional mortgages. For example, an FHA mortgage has less stringent underwriting criteria and only requires a 3.5% down-payment. However, an FHA mortgage puts extra burdens not only on the buyer, but on the broker and seller.

I recently sold a house that had been rented for a number of years. Instead of spending money making minor repairs, my broker and I chose to discount the price and give the buyer control over the improvements. What happened next surprised me. The FHA appraiser, hired by the lender, made a number of demands, such as repainting some of the exterior boards and documenting the design of the septic system.

I guess the FHA wants to protect the buyer, but these demands can kill a deal.

It turns out that my experience is quite common and, in fact, some realtors tell their clients that if they have a choice, they should not sell to people who are using an FHA insured mortgage. In most home sales, the appraisers’ only job is to determine if the value of the house is greater than the loan amount. But FHA appraisers are required not only to value the property, but to inspect the property using a 50 item health and safety checklist.

Dealing with this checklist complicates the sale. So it seems to me, the FHA is working at cross purposes.

Although the FHA makes it easier to get a mortgage and become a homeowner, their extra requirements limit the buyers’ housing choices and puts them at a disadvantage in dealing with brokers and sellers. In other words, in trying to protect homebuyers, the FHA may be making first-time home-ownership harder – which in turn leads me to recommend that the FHA streamline the process and leave the inspection to qualified home inspectors.


John Vogel is a retired professor from the Tuck School of Business. His tenure at Dartmouth began in 1992, where he taught Real Estate and Entrepreneurship in the Social Sector, among other subjects. He was named by the “Business Week Guide” to Business Schools as one of Tuck’s “Outstanding Faculty” members.
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