- The seller has the option to reject and select whichever offer or loan they believe is best for them.
- The tighter home inspection is the most unappealing part of FHA loans for most sellers.
- A large down payment and a good credit score might increase your chances of getting your dream home.
- If money is an issue, consider purchasing properties that have been on the market for a longer period of time. The competition is likely to be lower, and the owner is more inclined to negotiate the price.
Sellers have the legal right to consider multiple offers and select the one that they believe best serves their needs. So, yes, a seller can refuse an FHA loan in the same way that they can refuse a conventional loan.
However, rejecting FHA loans solely because of negative misconceptions is not advisable. Many FHA loan borrowers are well-qualified and deserving of the opportunity to realize the American dream of home ownership.
It’s time to untangle the web of FHA loan misinformation for both buyers and sellers.
What Sellers Are Fearful Of
For FHA buyers looking to stand out in a competitive market, it’s critical to understand what a seller is looking for.
Stricter Requirements for Home Inspections
According to a 2021 survey done by the National Association of Realtors, the stricter home inspection requirements are the least appealing aspect of an FHA loan for sellers.
FHA appraisals are required and include a safety inspection to ensure the buyer receives a safe and secure home. If the house fails the inspection, the FHA will not approve the loan unless the necessary repairs are made.
To avoid the inconvenience, some sellers flatly refuse FHA loans. Unlike conventional loans, FHA purchasers cannot waive or delete the appraisal.
A common misperception is that the FHA will perform a thorough home inspection. This is not correct; it will simply perform a basic safety examination.
They will inspect the physical state of the property and look for risks, odors, and physical problems; they will also appraise the property’s longevity, location, and livability.
The appraiser will fill up a Valuation Conditions (VC) form, noting all necessary repairs.
Here are some frequent things that will cause the inspection to fail:
- Lead-based paint
- Roof leaks
- Broken windows
- Unsafe exterior doors
- Obvious pests & termites
- Tripping and falling hazards
As a seller, don’t be too concerned about the safety inspection because it is only a general overview of the property’s safety.
Buyers should avoid purchasing a property with numerous issues because the FHA will not accept it.
You can also speak with the seller ahead of time and ask them to make the necessary repairs and take your offer into consideration.
If you want to buy a fixer-upper that will require more than $5,000 in repairs, you can opt for an FHA 203(k) loan which rolls in together your mortgage and repair payments.
Tougher Appraisal Procedures
The **second and third reasons why FHA loans are undesirable, according to the same NAR poll, are “home appraisal contingency” and “house does not appraise.” ** Let’s take each one one at a time, beginning with home does not appraise.
- Home does not appraise. Appraisal contingencies safeguard the borrower by allowing them to walk away from the contract without penalty if the appraisal is low.
- Home appraisal contingency. When low appraisal happens, appraisal contingencies protect the borrower by allowing them to walk away from the deal without any penalties.
If the appraisal falls short, FHA buyers are likely to walk away, leaving the seller with nothing.
Furthermore, sellers look for bidders who are willing to cover the difference if the assessment falls short. Most FHA homebuyers are unable to do so because their demographic is made up of people who can only put down a small amount of money due to a lack of available funds.
Increased Closing Time
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 a 2021 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 lender and have an upfront discussion with them and your real estate agent to verify the timeframe where you get to close.
Some sellers are also put off by the modest down payments commonly associated with FHA purchasers.
Many sellers prefer buyers who will put down a larger deposit since it reduces their risk. ****
There isn’t much you can do if you don’t have the necessary finances.
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
- national origin
- familial status, or
If you feel that you are being discriminated against, file a complaint with the U.S. Department of Housing and Urban Development (HUD).
Converting to Conventional Loans
As a buyer, conventional loans are the ideal alternative if you have sufficient finances and a decent credit score. Sellers typically prefer them due to larger down payment rates and higher credit ratings as a result of the tighter qualification process.
However, even if you have an FHA loan now, you can refinance it into a conventional loan or another FHA loan later, also known as streamline refinancing.
How to Make an Attractive FHA Loan Offer
FHA loans are an excellent choice for low- to middle-income families looking to purchase their first home. Their low minimum down payment and credit score requirements are nowhere to be seen in conventional loans.
But the lenient requirements may develop the misconception that FHA loan borrowers are “risky” buyers who are more likely to default on a loan.
So, even with an FHA financing, how can you make your offer stand out?
- Improve your credit score.
- Save for a larger down payment.
- Choose properties that have been on the market for a longer period of time rather than ones that have recently joined. There is frequently less competition. When it comes to choosing a home, make sure that it will not exceed the loan limits in your location.
- Communication that is open. Communication with everyone engaged in the home-buying process, especially the seller, is critical. Who knows, a little talk might be precisely what a seller needs to alleviate any concerns.
FHA loans have a “undeserved” bad reputation.
In the end, buyers should not be judged solely on the loan they use.
FHA loans are an excellent option for first-time home buyers.
Look beyond the loans if you’re a seller. Examine the borrower’s history and treat them in the same manner as your other offers. You might overlook a deserving and responsible homeowner.
Do you still have questions? We’re here to answer them!