Why would a seller not accept an FHA loan?

39 Replies

Why would a sellers not accept an FHA loan and would rather do a conventional loan even though the property has a solid feel of passing the inspection?

@Gilbert Lugo

The FHA loan has an inspection and appraisal requirement. If the house fails either then it sticks with the property for 6 months. So that means that if it comes back 10K less than agreed on price or FHA says fix the roof, the seller is in a bind. FHA loans also speak to the purchasing power of the buyer. So a buyer that qualifies for a conventional or all cash etc has stronger odds of making it to the closing table.

It just speaks to the strength of the offer.

@Gilbert Lugo

Borrowers that get FHA loans generally have to get FHA loans.  They're usually a last resort and the borrower is perceived by the seller as more risky.  If I was a seller, all other things being equal, I'd go with the borrower that has a Fannie 97% approval over an FHA borrower.

In truth, they're right. There are lots of lower down payment options, but FHA tends to have the more leniency in guidelines as well as an allowance for lower credit scores.

Stephanie

ALL loans have an appraisal contingency. An FHA appraisal is different from a conventional appraisal in that the appraiser has to make sure that the property meets the minimum habitable condition standards. YOU should want that too!

I disagree that people get FHA loans because they HAVE to. FHA provides a great opportunity for someone to come in with 3.5% down versus 5% down. The difference between those equity positions is not significant when factoring risk. HOWEVER, FHA loans usually are more forgiving on FICO scores, so in that circumstance, you may have a Buyer who has a lower FICO credit score.

In my opinion, there are 2 main reasons why a Seller doesn't want a Buyer to come in with an FHA loan...

1) FHA loans have closing costs that the Buyer is not allowed to pay, and the Seller must pay

2) If the property is a condo/townhome, the HOA must have an FHA condo certification in order to allow FHA loans to be used for new purchases. If the HOA doesn't have this cert, then no Seller can accept an FHA loan. So the Seller may already know that his community doesn't have their FHA condo cert.

Hope that helps!

I believe if a house does not appraise, an FHA buyer CANNOT bring more money to the table to cover the difference. A conventional buyer can. Had I sold my last house to an FHA buyer I would have lost $15,000 on the sale ($295k appraisal and the final agreed price was $310k). Also there are certain items that must be done to meet FHA requirements, that can be negotiated on a conventional loan. This doesn't necessarily mean everyone should avoid FHA (or VA) buyers, but some people choose to, as they can be riskier.

Inspections, inferior credit, loads of reasons to avoid FHA if you can. However limiting your pool of potential buyers could negatively impact your sale price. So often when a seller won't go FHA, they are more concerned about the inspections than weak credit buyers.

The main reason is the 90 day flip rule The buyer will have to wait 91 days to purchase a flip property from a seller. VA USDA conventional does not have that stipulation

First off thank you everyone for your input. The reason why I asked is because I'm in a bit of a bind. if I decide to go the conventional route it would empty my account with little reserves left so FHA see the 3.5% down as better suiting to my financial standing. Also there are no HOAs and compared to the comps around it makes this property fairly priced. But the problem here is mostly the Realter, some how feels as if he has to make decisions on behalf of the seller. At first he did not want to present my offer to the seller.

The Realter is doing a huge disservice to his seller. 

Originally posted by @Gilbert Lugo :

First off thank you everyone for your input. The reason why I asked is because I'm in a bit of a bind. if I decide to go the conventional route it would empty my account with little reserves left so FHA see the 3.5% down as better suiting to my financial standing. Also there are no HOAs and compared to the comps around it makes this property fairly priced. But the problem here is mostly the Realter, some how feels as if he has to make decisions on behalf of the seller. At first he did not want to present my offer to the seller.

The Realter is doing a huge disservice to his seller. 

FHA is typically a worse product than the 3% down conventional Homeready loan. You can have a lower down payment with home ready, and likely have a lower payment as well as the lower MI outweighs the slightly higher rate.

@Gilbert Lugo

Get your lender to do the math for you.

Compare the rate of a 97% product with lender paid MI vs FHA with upfront MIP and monthly MI (not even talking about the ability to get rid of MI at 78% ltv vs. MI forever).

@Russell Brazil is absolutely right.

@Cara Lonsdale Here's an example of what I mean by "have to".  

Someone wants a renovation loan. They can use Fannie Mae's Homestyle Renovation loan or FHA 203K. If someone has enough money to put down 15%, they can buy units on an investment property with Fannie's Homestyle Renovation loan and not have to live in the property, but if they only have 3.5% down and will live in it, they have to go FHA to get the renovation money on units.

Here's another.  

If you've got a 580 middle score, you're not going to find a Fannie 97 (a comparable product) but you'll get FHA all day long. Again, the borrower has to go FHA because there is no option. That's when the seller has to worry about whether the FHA appraiser is going to care about whether their step is too high or if the railing going to the basement is tight enough etc...(and sellers don't want to have to worry about anything).

The products FHA insures are very specific and nichey, but useful in certain circumstances. The downside for the seller is there is no other place to go for that borrower if they don't qualify for FHA, but conversely, if they don't qualify for conventional, they may qualify for FHA.

Hope that clarifies

Stephanie

@Stephanie Potter and @Russell Brazil are both on point.

Something I'll add:

FHA is often the "whoops" backup plan.

For example suppose you have a 642 FICO score and I send you out house hunting with conventional in mind.

Three months later you go under contract and "whoops" your FICO dropped a few points. So we pivot to FHA and it still closes, and closes on time.

Suppose another borrower has a 582 FICO and the same thing happens. Now the "whoops" is that it does not close at all, since FHA is the backup plan for FICOs as low as 580. To a seller, FHA looks like you're starting with what should be the backup plan.

For folks looking to do FHA multifamily with good credit that do not currently own real estate (mentioning this because I know man yon this forum are interested exclusively in multifam), Freddie Mac Home Possible @ 95% LTV is both better financing, and makes for an offer that is more likely to be accepted.

Re: "but it's 5% down instead of 3.5% down!" -- FHA has a 1.75% funding fee, typically tacked onto your mortgage balance. 3.5% + 1.75% = 5.25%. Except that this fee is gone forever, whereas 5% down conventional is 5% towards equity.

@Mike Cumbie just to clarify conventional have appraisal requirements as well and FHA loans do not require inspections. Yes FHA loans have a stricter health and safety factor to take into consideration and there are still situations where even a conventional mortgage may not work if the home has issue that are brought to light through the appraisal.

One other thing to keep in mind. The Fannie 97% program is only available to 1st time buyers not someone who may be buying another primary home. There the 97% program wouldnt apply and if DP funds are limited FHA is the better option. In my opinion cash on hand is not as good an indicator of a buyers ability to qualify if you are comparing apples to apples when it comes to low money down financing. It really is about the credit and DTI.

Maybe one of the Realtors here can comment, but is listing the probable loan product required in the offer? I haven't written an offer in a few years, but I seem to recall my contingency was financing, not a specific type of financing. Maybe the offer can be written with a less-specific financing contingency to give more flexibility? 

If/when the loan closes, the seller isn't going to care about the type of product you use, and you should give yourself as many outs as possible. 

In this case I have mid 700 credit score and have no problem showing the agent proof that I can back up my offer on top of my pre approval letter from my lender. My issue is going the conventional route and tying up all of my cash into this one place we’re FHA I can get the property with very little upfront to achieve relatively the same result. 
 
Btw Stephanie thank you for your insite 




Originally posted by @Stephanie Potter :

@Gilbert Lugo

Get your lender to do the math for you.

Compare the rate of a 97% product with lender paid MI vs FHA with upfront MIP and monthly MI (not even talking about the ability to get rid of MI at 78% ltv vs. MI forever).

@Russell Brazil is absolutely right.

@Cara Lonsdale Here's an example of what I mean by "have to".  

Someone wants a renovation loan. They can use Fannie Mae's Homestyle Renovation loan or FHA 203K. If someone has enough money to put down 15%, they can buy units on an investment property with Fannie's Homestyle Renovation loan and not have to live in the property, but if they only have 3.5% down and will live in it, they have to go FHA to get the renovation money on units.

Here's another.  

If you've got a 580 middle score, you're not going to find a Fannie 97 (a comparable product) but you'll get FHA all day long. Again, the borrower has to go FHA because there is no option. That's when the seller has to worry about whether the FHA appraiser is going to care about whether their step is too high or if the railing going to the basement is tight enough etc...(and sellers don't want to have to worry about anything).

The products FHA insures are very specific and nichey, but useful in certain circumstances. The downside for the seller is there is no other place to go for that borrower if they don't qualify for FHA, but conversely, if they don't qualify for conventional, they may qualify for FHA.

Hope that clarifies

Stephanie


chris thanks for replying. I have a strong score. I’m in the situation which expressed at the bottom but I wasn’t aware of Freddie Mac I will look in to it thank you

Originally posted by @Chris Mason :

@Stephanie Potter and @Russell Brazil are both on point.

Something I'll add:

FHA is often the "whoops" backup plan.

For example suppose you have a 642 FICO score and I send you out house hunting with conventional in mind.

Three months later you go under contract and "whoops" your FICO dropped a few points. So we pivot to FHA and it still closes, and closes on time.

Suppose another borrower has a 582 FICO and the same thing happens. Now the "whoops" is that it does not close at all, since FHA is the backup plan for FICOs as low as 580. To a seller, FHA looks like you're starting with what should be the backup plan.

For folks looking to do FHA multifamily with good credit that do not currently own real estate (mentioning this because I know man yon this forum are interested exclusively in multifam), Freddie Mac Home Possible @ 95% LTV is both better financing, and makes for an offer that is more likely to be accepted.

Re: "but it's 5% down instead of 3.5% down!" -- FHA has a 1.75% funding fee, typically tacked onto your mortgage balance. 3.5% + 1.75% = 5.25%. Except that this fee is gone forever, whereas 5% down conventional is 5% towards equity.

@Gilbert Lugo the concern with the appraisal attaching to the property still remains even if you are a good borrower. This is a very real concern in a rising market. Say you are under contract to buy it for $500k, and it appraises at $450k. Well if it is FHA you are stuck with that low appraisal til it ages out, while if it is conventional, you can just switch lenders or loan products to try and get a new appraisal price.

@Gilbert Lugo as was pointed out by @Russell Brazil the 3% down on HomeReady loan would cost you less. I don't follow why you are still saying you need FHA for lower down payment?

At the end of the day, it is a sellers market. They don't want to waste their time with FHA because in general it is more of a hassle. Picky inspectors can require thousands in repairs over silly things. My guess is the seller and/or agent are just experienced enough to know FHA isn't worth the hassle. Instead of trying to convince them something that is less desirable is good (which you won't because they know better), why don't you just find a better loan product as was suggested.

Originally posted by @Gilbert Lugo :

First off thank you everyone for your input. The reason why I asked is because I'm in a bit of a bind. if I decide to go the conventional route it would empty my account with little reserves left so FHA see the 3.5% down as better suiting to my financial standing. Also there are no HOAs and compared to the comps around it makes this property fairly priced. But the problem here is mostly the Realter, some how feels as if he has to make decisions on behalf of the seller. At first he did not want to present my offer to the seller.

The Realter is doing a huge disservice to his seller. 

So, you just reiterated my point that not all Buyers seeking an FHA loan are strapped with options, but rather are "choosing" to use the FHA for various reasons (down payment being the most common) and the lack of reserves requirement. Those both make it very appealing.

In terms of the agent who is refusing to submit your offer....this is actually not allowed unless the agent has expressed written instructions from the Seller not to show him (the Seller) FHA offers. So, he cannot do this. In fact, if this is really the case, you can actually circumvent the agent, and go directly to the Seller OR you can also demand that you have the opportunity to present your offer yourself, directly to the Seller. If he refuses you then, you contact his broker. He is in violation.

@Gilbert Lugo I have had RE agents try to push me around before. If FHA is what you're most comfortable with for whatever reason feel free to present the offer. Don't let your agent or the seller's agent pressure you into anything different. They both would ultimately prefer a cash offer, as it's much more likely to close and thus they are much more likely to get paid. However they both have an obligation to present your offer - your agent to the buyer's agent and they buyer's agent to the buyer. Key word here is "agent." These folks work for you and not the other way around. Also it's been said that if you're not submitting offers that are "embarrassing" then you're not going to find deals. For some people that means a low dollar value. For others that means with financing terms that the seller doesn't love. Ultimately you must do what is right for you and stick to your own script. Sorry for the rant, but like I said I have had similar experiences.

Originally posted by @Shawn Q. :

Maybe one of the Realtors here can comment, but is listing the probable loan product required in the offer? I haven't written an offer in a few years, but I seem to recall my contingency was financing, not a specific type of financing. Maybe the offer can be written with a less-specific financing contingency to give more flexibility? 

If/when the loan closes, the seller isn't going to care about the type of product you use, and you should give yourself as many outs as possible. 

 Depends on your Contracts.  In IL & WI the financing type is listed

@Brie Schmidt - but is it the percentage and type, or just owner-occupied or investor? It's more restrictive if you have to list the prospective method as well as the percentage. Just curious. 

@Gilbert Lugo Can you possibly look around to different lenders and see if they have like a 5% down conventional loan? 

I purchased my multifamily with an FHA loan. It came with unexpected headaches during the FHA appraisal.

One of the units required a stove replacement

I had to paint over any peeling paint (due to lead risk). In my situation, there were over 30 exterior windows with cracked paint.

In addition, this was a short sale purchase.  In retrospect, it is a small miracle that this purchase went thru!

Originally posted by @Shawn Q. :

@Brie Schmidt - but is it the percentage and type, or just owner-occupied or investor? It's more restrictive if you have to list the prospective method as well as the percentage. Just curious. 

 We have to put the down payment and loan type

This is why CASH is king, no hassle with all the above issues.

Then you should get a discount with cash or walk 

Free eBook from BiggerPockets!

Ultimate Beginner's Guide Book Cover

Join BiggerPockets and get The Ultimate Beginner's Guide to Real Estate Investing for FREE - read by more than 100,000 people - AND get exclusive real estate investing tips, tricks and techniques delivered straight to your inbox twice weekly!

  • Actionable advice for getting started,
  • Discover the 10 Most Lucrative Real Estate Niches,
  • Learn how to get started with or without money,
  • Explore Real-Life Strategies for Building Wealth,
  • And a LOT more.

Lock We hate spam just as much as you

Create Lasting Wealth Through Real Estate

Join the millions of people achieving financial freedom through the power of real estate investing

Start here