If you’re a first-time homebuyer, you may have heard that sellers don’t like FHA loans. You were probably left wondering why the seller would care about the type of mortgage you’re obtaining, as long as they get their money.
Well, the truth is that sometimes sellers do care and we’re here to explain why. But first, we want to cover the differences between conventional and FHA loans.
Conventional loans are generally more difficult to qualify for than FHA loans. People that usually qualify for a conventional mortgage possess three qualities: good credit, steady income, and funds for a down payment.
It is possible to qualify for a conventional loan without putting 20% down. However, lenders generally require those borrowers to purchase Private Mortgage Insurance. Lenders require this to protect themselves in case the borrower defaults.
These mortgages come in a variety of sizes and terms, including fixed- and adjustable-rate loans, and generally conform to the industry standards set by Fannie Mae and Freddie Mac.
FHA loans are a government-insured loan. They are typically easier to qualify for, with lower down payment and credit score requirements, making them a perfect solution for those that can’t qualify for a conventional loan. They also generally have lower closing costs than conventional loans. All of these factors make FHA loans an ideal choice for first-time homebuyers.
While they do offer borrowers more flexibility, they often have higher interest rates than their conventional counterparts. Most FHA loans also require borrowers to purchase mortgage insurance.
When shopping for a home, many buyers consider getting an FHA loan FHA loans allow buyers to purchase a home with a low down payment and flexible credit requirements. This makes them an attractive option, especially for first-time homebuyers
However, in competitive housing markets, some sellers refuse to accept offers backed by FHA loans. As a buyer, you may be wondering – can a seller legally refuse an FHA loan offer? Let’s take a look at the details.
Why Do Some Sellers Avoid FHA Loans?
There are a few key reasons why a seller may not want to accept an FHA loan offer:
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Stricter appraisal standards. FHA loans require the home to pass an appraisal based on FHA minimum property standards. These standards focus on the safety, security and livability of the home. The appraisal may require the seller to make repairs before closing.
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Smaller down payment. FHA loans only require a 3.5% down payment. Sellers often prefer larger down payments, which show the buyer is financially committed.
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Longer timeline The FHA appraisal and underwriting process can take longer than conventional loans Sellers may want a faster timeline.
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Perception of risk. Some sellers think FHA loans are riskier or more likely to fall through. However, when fully underwritten, FHA loans are generally as safe as conventional loans.
Can a Seller Legally Refuse an FHA Loan Offer?
The short answer is yes. Sellers are not legally obligated to accept any offer. The Fair Housing Act does prevent discrimination based on race, color, religion, sex, handicap, familial status, or national origin. But sellers can turn down an FHA offer for legitimate business reasons.
As the buyer, there is no recourse if a seller refuses an FHA loan. The best option is to improve your offer or explore other financing like conventional loans.
Tips for Getting an FHA Offer Accepted
If your heart is set on a certain home, there are some strategies to boost the appeal of your FHA loan offer:
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Make a large down payment. Putting 10-15% down shows financial commitment. This offsets concerns about small FHA down payments.
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Shorten contingencies. Ask for a shorter inspection period and be ready to remove appraisal contingencies. This speeds up the timeline.
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Send a pre-approval letter. Include a letter from your lender verifying you are fully approved for the FHA loan. This gives confidence the loan will close.
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Highlight your qualifications. Mention strong employment history, savings, and other assets to show you are a low-risk buyer.
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Bid competitively. In a bidding war, make your best offer on price and closing date. Consider offering non-refundable earnest money.
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Get a backup loan. Apply for a conventional loan as a backup in case the FHA falls through. This gives the seller assurance.
Alternatives If Your FHA Offer Is Refused
If you can’t get a seller to accept your FHA loan, you have a few options:
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Improve your credit. Boost your credit score over 620 to qualify for a conventional loan with similar benefits.
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Save up for a larger down payment. 20% down removes the need for mortgage insurance.
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Broaden your search. Look in more affordable areas or smaller markets where FHA loans are more readily accepted.
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Rent instead. If buying isn’t feasible right now, renting can help you save up for a future down payment.
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Explore other programs. Research state/local down payment assistance programs or VA and USDA loans.
The Bottom Line
It can be frustrating when sellers refuse FHA financing. But know that you have options. Improving your offer, adjusting your expectations, or finding alternative home loans can still make your dream of homeownership a reality. With persistence and smart preparation, you can land the home you want – even with an FHA loan.
Reasons Sellers Don’t Like FHA Loans
There are two major reasons why sellers might not want to accept offers from buyers with FHA loans. Both reasons have to do with the strict guidelines imposed because FHA loans are government-insured loans.
Can a Seller Refuse an FHA Loan ?
FAQ
Why would a seller refuse an FHA loan?
How does an FHA loan affect the seller?
Can you deny a FHA loan?
Why would a seller only want a conventional loan?
Can a seller reject an FHA loan offer?
This can be a deterrent for sellers, leading them to reject an FHA loan offer. A seller may be required to make repairs to their home based on the findings of the FHA appraisal process if they want to move forward with the sale. Required repairs are generally limited to those necessary to ensure:
Why does a seller not accept an FHA mortgage?
Let’s dive deeper into some of the reasons why a seller may not accept an FHA mortgage. Because conventional loans have stricter approval standards, sellers may automatically believe a buyer with a conventional loan is in a better financial position to purchase their home.
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.
Is an FHA loan a problem for a home seller?
However, FHA loans can sometimes be more of an issue than conventional financing for home sellers. Below is a review of six circumstances where an FHA loan could become a problem for a home seller. By going into a sale with your eyes wide open, you will be better equipped to make an intelligent decision.