Sellers have the legal right to go through multiple offers and choose the one that they believe serves them best. So the answer is yes, a seller can refuse an FHA loan, just like how they can also reject a conventional loan.
But turning down FHA loans just because of the negative misconceptions is inadvisable.
Many homebuyers with FHA loans are well-qualified and deserving of an opportunity to fulfill the American dream – home ownership.
It’s time to untangle the web of misinformation on FHA loans for both buyers and sellers.
What Sellers Are Worried About
For FHA buyers looking to stand out in a competitive market, it’s important to get in the mind of a seller and what they’re looking out for.
Stricter Home Inspection Requirements
According to a survey done by the National Association of Realtors, the least attractive aspect of an FHA loan for sellers is the stricter home inspection requirements.
FHA appraisals are mandatory and include a safety inspection to ensure that the buyer will be getting a safe and secure home. If the home doesn’t “pass” the inspection, the FHA will not grant the loan, unless the necessary repairs are fixed.
This is why some sellers outright reject FHA loans to avoid the hassle. FHA buyers can’t waive or remove the appraisal too, unlike with conventional loans.
A misconception is that the FHA will conduct a full-on home inspection. This is not true, it will only conduct a simple basic safety inspection.
They will evaluate the physical condition of the property, and see if there are hazards, odors, and physical defects; they will also assess the longevity of the property, the site of the property, and livability.
The appraiser will complete a Valuation Conditions (VC) form, listing all the necessary repairs, if there are any.
Here are some common items that come up that will fail the inspection:
- Lead-based paint
- Roof leaks
- Broken windows
- Dry-rot
- Unsafe exterior doors
- Obvious pests & termites
- Tripping and falling hazards
As a seller, don’t let the safety inspection bother you too much since it is just a general overview of the safety of the property.
For buyers, avoid getting a property with many issues since the FHA will not accept it. It’s also important to make sure that you know how much you qualify for because this has it’s hand to play here as well.
You can also speak to the seller ahead of time and get them to make the necessary repairs and consider your offer.
If you’re looking to get a fixer-upper with repairing costs over $5,000, you can opt for an FHA 203(k) loan which rolls in together your mortgage and repair payments.
Stricter Appraisal Process
According to the same NAR survey, the **2nd and 3rd reasons why FHA loans are unattractive are: “home appraisal contingency” and “home does not appraise”.** Let’s tackle each individually, starting with home does not appraise.
- Home does not appraise. FHA home appraisal values can sometimes come out shorter than the agreed upon price. This is a problem because the FHA loan will only lend the amount equivalent to the appraised value of the property.
- Home appraisal contingency. When low appraisal happens, appraisal contingencies protect the borrower by allowing them to walk away from the deal without any penalties.
So in the possible scenario that the appraisal falls short, chances are FHA buyers will back out, leaving the seller empty-handed.
Moreover, sellers want buyers that would be willing to cover the difference if the appraisal comes out short. Most FHA home-buyers can’t do that since its demographic are those who are putting down less due to a lack of on-hand funds.
Longer Time to Close
The 4th aspect that makes FHA loans unattractive based on the survey is the “longer time to close.”
This is a misconception that is unfair to FHA borrowers. According to an article by Forbes, FHA loans actually take only 3 days longer to close compared to conventional home loans.
What’s advisable to avoid this issue is to find a good local lender and have an upfront discussion with them and your real estate agent to verify the timeframe where you get to close.
Low Down-Payment
Some sellers are also turned off with the low down-payments that are heavily associated with FHA buyers.
Many sellers prefer those that will put in a higher down payment since it means lower risk on their part.
If you don’t have the funds to do so, there’s not much you can really do about it.
Discrimination is Not Allowed
Sellers can choose whichever offer or loan they prefer but note that according to The Fair Housing Act, landlords, real estate companies, municipalities, banks, other lending institutions, and homeowners insurance companies cannot make housing unavailable to people based on their:
- race or color
- religion
- sex
- national origin
- familial status, or
- disability
If you feel that you are being discriminated against, file a complaint with the U.S. Department of Housing and Urban Development (HUD).
Switching to Conventional Loans
If you have enough funds and a good credit score, conventional loans can usually be the best option as a buyer. Sellers usually prefer them because of the higher down payment rates and better credit scores which is a result of the stricter qualification process.
But know that even if you have an FHA loan today, you can refinance it later into a conventional loan or to another FHA loan, also known as streamline refinancing.
How to Make an Attractive Offer With an FHA Loan
FHA loans are a great option for low to middle-income families in buying their first homes. Their low minimum down payment and credit score requirements are nowhere to be seen in conventional loans.
But the lenient FHA loan requirements may cause some sellers to develop a misconception that FHA loan borrowers are “risky” buyers and have a higher likelihood of defaulting on a loan.
So, how can you make your offer stand out, even with an FHA loan?
- Build an excellent credit score
- Save to put down a higher down payment
- Choose homes that have been on the market for longer, instead of those that have just entered. There’s usually less competition there.Speaking of choosing homes, ensure that the property you will be purchasing won’t go over the loan limits in your area.
- Open communication. Communication with everyone involved in the process of home-buying, especially the seller, is very important. Who knows – a short chat can be just the thing to clear out any worries a seller might have.
FHA Loans Get an “Undeserved” Bad Rap
When it comes down to it, buyers shouldn’t be judged outright on the loan they use.
FHA loans are a great way to buy a home, especially for first-timers.
If you’re a seller, look beyond the loans. Look at the borrower’s history and treat them equally with your other offers. You might miss out on an otherwise deserving and responsible homeowner that is wanting to buy your home.
Still have more questions? We’re here to get them answered!
