Loans insured by the Federal Housing Administration, better known as FHA loans, are attractive to buyers. That’s mainly because they require down payments of just 3. 5 percent of a home’s purchase price for borrowers with FICO credit scores of 580 or higher. But will applying for an FHA loan hurt your chances of landing your dream home?.
FHA loans are still seen unfavorably by some sellers, who see them as a last resort for borrowers with bad credit. They worry that FHA deals are less likely to close because of this. Some sellers think that FHA home inspections are too thorough and that if they work with a borrower who takes out a conventional loan that isn’t insured by the federal government, they won’t have to pay thousands of dollars for repairs that they could have avoided.
Mortgage lenders say no if an FHA loan is a good fit for you. It’s easier to qualify for an FHA loan if your credit is less than perfect. If you don’t have a lot of money saved for a down payment, the lower down payment requirements are especially crucial.
But lenders warn that you might run into sellers with a negative impression of FHA loans. The good news is that many sellers are willing to work with any borrower as long as they meet the mortgage qualification requirements.
The largest disadvantage of FHA loans, according to Dallas-based The Lenders Network founder and president Randall Yates, is the cost of mortgage insurance.
Mortgage insurance protects your lender, not you, in case you stop making payments. When you accumulate sufficient home equity or make a down payment of at least 20% of the purchase price of your home with a conventional mortgage loan, you can stop paying mortgage insurance. FHA loans, though, require an upfront private mortgage insurance fee of 1. 75 percent of your home’s purchase price no matter how much of a down payment you scrape together.
FHA loans also come with an annual mortgage insurance premium that ranges from 0. 45 percent to 1. 05 percent of your mortgage amount, depending on your loan’s term and down payment. Depending on your down payment and loan term, you will pay this amount for 11 years or until your mortgage is paid off in full.
Sellers frequently worry that an appraisal done for an FHA loan will come in lower than an appraisal of the same property when the buyers are using a conventional mortgage, according to Chris Morenza, a real estate agent with RE/MAX Gold in Miami.
According to Morenza, he once worked with a seller whose mortgage lender had initially requested a traditional appraisal. In that appraisal, the appraiser valued the home at just above the purchase price. The lender then realized that the buyers needed FHA financing. The house was valued $25,000 less than it was during the traditional appraisal when the lender ordered a new appraisal from an appraiser who was approved by HUD.
Morenza said that the $25,000 difference represented more than 10 percent of the conventional appraised value of $230,000.
As a first-time homebuyer, you’ve likely heard the whispers: sellers don’t like FHA loans. But why? After all, shouldn’t they just care about getting their money?
Well, the truth is, sometimes sellers do have reservations about FHA loans. Let’s dive into the reasons behind their hesitation and explore how it might affect your homebuying journey.
The Lowdown on FHA Loans
First, let’s understand what makes FHA loans unique. Backed by the Federal Housing Administration, these loans are known for their low down payment requirement (as low as 3.5%!), making homeownership more accessible to those with limited savings. Additionally, FHA loans often have less stringent credit score requirements compared to conventional loans.
These features make FHA loans a popular choice for first-time buyers, but they also come with certain regulations that can give sellers pause.
Why Sellers Might Hesitate
Here are the main reasons why some sellers might not be thrilled about FHA offers:
1. Appraisal Concerns: FHA loans require a stricter appraisal process. The seller has to either reduce the price or take the chance that the deal won’t go through if the home’s appraised value is less than what was originally agreed upon. With conventional loans, there’s more flexibility for negotiation in such situations.
2. Stringent Repair Requirements: FHA loans have stricter property condition requirements. The appraiser will look for specific defects that could pose safety or habitability concerns. If any issues are found, the seller is responsible for repairs before the sale can proceed. This can be a significant financial burden for some sellers.
3. Closing Delays: The additional steps involved in FHA loans, such as the appraisal and repair process, can sometimes lead to longer closing times. This can be frustrating for sellers who want a quick and smooth transaction.
4. Perceived Risk: A smaller down payment could be seen by some sellers as an indication that the buyer is not as serious, which could increase the likelihood that the deal will fall through. However, statistically, FHA loans have similar closing rates to conventional loans.
Navigating the FHA Landscape
So, what does this mean for you as a potential FHA buyer? Don’t fret! While some sellers might have reservations, there are plenty who are open to FHA offers. Here are some tips to navigate the situation:
1. Be Transparent: Be upfront with the seller about your financing plans. Talk about the advantages of FHA loans, including their accessibility to first-time buyers and lower down payment.
2. Obtain Pre-Approval: Possessing a pre-approval letter from a respectable lender indicates your preparedness financially and your sincerity as a purchaser.
3. Be Flexible: Be prepared to negotiate on price or closing date if necessary.
4. Consider Conventional Loan Options: If you have the financial means, explore conventional loan options to broaden your search and potentially appeal to a wider range of sellers.
5. Locate a knowledgeable Agent: Assist a real estate agent with FHA loan experience. They can help you locate sellers who are receptive to FHA offers, represent your interests, and lead you through the process.
Remember, the key is to be informed, prepared, and flexible. With the right approach, you can successfully navigate the homebuying journey even with an FHA loan.
Don’t Let Fear Hold You Back
Owning a home is a dream for many, and FHA loans can be a valuable tool to achieve that dream. Don’t let the concerns of some sellers deter you from pursuing your goals. With the right information and a proactive approach, you can find the perfect home and secure the financing that works best for you.
Will sellers pass up your offer?
Yates stated that if buyers aren’t the only ones putting in an offer on a property, an FHA loan could work against them.
Yates stated, “Sellers typically give preference to borrowers with conventional financing if there are multiple offers on a home.”
Why is that? Sellers fear they will encounter issues with the home appraisal and inspection procedures if they approve an offer from a borrower using FHA financing.
To close an FHA loan, an appraiser approved by the U. S. Department of Housing and Urban Development will have to determine the current market value of the home. A home inspector will tour the property following the acceptance of an offer and the signing of a contract to make sure it satisfies HUD’s minimum property standards. The phrase “minimum property standards” makes some sellers nervous.
Of course, regardless of whether they are using conventional or FHA financing, buyers can and should request a home inspection in conjunction with any loan. But the minimum standards for a home’s condition are stricter for an FHA loan, Yates said. Sellers will have to make the repairs necessary to meet these minimum standards before the sale can close.
This may deter some sellers from accepting FHA offers, particularly if they are receiving multiple bids on their homes.
Yates stated, “Sellers don’t want to make repairs and further delay closing because the requirements for conventional loans are much more lenient.”
Some sellers believe, too, that borrowers who are taking out FHA loans do not have strong credit. They fear that the decreased likelihood of FHA buyers being approved for their mortgage loans will cause their home sale to fall through and waste their time, according to Yates.
“Conventional loans have higher minimum requirements than FHA and require a larger down payment,” Yates said. Because they believe the buyer is in a better financial position, sellers prefer a buyer with conventional financing over FHA financing. ”.
JW Roeder, a real estate agent with Overland Park, Kansas’s Reece Nichols Realtors, concurred that FHA purchasers may encounter opposition when submitting an offer on a property. He said it all comes down to the perceptions that sellers have regarding FHA loans.
According to Roeder, in competitive markets where homes are more likely to draw multiple offers, this can be a more significant challenge. Sellers in these markets may choose to accept offers from buyers with conventional loans rather than from FHA buyers.
“Conventional loan buyers are more qualified and can close more quickly with fewer roadblocks,” according to Roeder, who stated that sellers expect this. “Peace of mind is a huge plus for sellers and plays a huge role in the decision-making process. ”.
The good news is that not all loans require low down payments, including FHA loans, so you shouldn’t worry if sellers reject your offer.
For borrowers with good credit, you can be eligible for a conventional loan backed by Fannie Mae with a down payment as little as 3% of the purchase price of your home. To apply for one of these loans, you’ll need to work with a mortgage lender, just like with an FHA loan.
Kirk Haverkamp is the editor and chief staff writer of Refi. com. With over 25 years of experience in journalism and public relations, this award-winning reporter and editor has covered community affairs for the Romeo (Mich ) Observer newspaper and writing about natural resources issues for the Great Lakes Commission in Ann Arbor, Mich. before joining Refi. com. He’s also a contributor to Credit. com, Investopedia and the MetroMode online magazine chain, among other work. He has a B. A. in English from Hope College and a Master’s Degree in journalism from Michigan State University.
Why are Sellers Are Rejecting FHA & VA Loans – First Time Home Buyer
FAQ
Why would a seller not want a FHA loan?
Why are FHA loans unattractive to sellers?
Why do sellers prefer conventional over FHA?
Why is it so hard to buy a house with an FHA loan?
Why do some sellers not want an FHA loan?
The federal government does not have a reputation for efficiency. There tends to be more “red tape” involved with an FHA loan. This is why some sellers do not want FHA loan offers from home buyers. They sometimes view the government’s involvement as a disadvantage to them.
Should you sell your home if you have an FHA loan?
Sellers who are serious about selling their home will evaluate all offers that come in, including those that are associated with an FHA loan. With that being said, a competitive seller’s market might alter the equation a bit.
Should a seller accept an FHA loan backed offer?
As a seller, you’re usually not taking on additional risk by accepting an offer from a buyer pre-approved for an FHA loan than you would with a buyer pre-approved for a conventional loan. In fact, it’s even possible for an FHA loan-backed offer to be the best offer in a multiple offer situation.
Should you avoid FHA loans in the real estate market?
Those making offers with government-backed home loans and, in particular, Federal Housing Administration (FHA) loans tend to experience refusals in the real estate market. Let’s take a look at why some sellers could avoid FHA loans and what home buyers can do if they’re having trouble getting their offer accepted.