Why would a seller not accept an FHA loan?
West Palm Beach, FL · Member since 2017 · 91 posts · 19 votes
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?
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.
@Cara Lonsdale thanks for correcting the info, one of those things I have always been told. I guess the FHA buyer can bring more to the table (however might not have more to bring).
@Cara Lonsdale thanks for correcting the info, one of those things I have always been told. I guess the FHA buyer can bring more to the table (however might not have more to bring).
FHA Amendatory Clause, which the seller is required to sign, and also probably the source of the confusion (the California Association of Realtors has this built into a CAR form, I assume this is true in most/all states):
Even though the "purchaser shall have the privilege and option" of moving forward if the appraisal comes in short, it's incredibly rare that an FHA buyer can make up an appraisal shortfall. Just like sellers and listing agents might assume an FHA buyer has a rock bottom FICO, they might also assume they are barely scraping together 3.5% down, since many do in fact multiply target sales price by 3.5% and save up exactly that much money, unaware of closing costs, that things break in homes after you buy them, etc.
@Cara Lonsdale thanks for correcting the info, one of those things I have always been told. I guess the FHA buyer can bring more to the table (however might not have more to bring).
FHA Amendatory Clause, which the seller is required to sign, and also probably the source of the confusion (the California Association of Realtors has this built into a CAR form, I assume this is true in most/all states):
Even though the "purchaser shall have the privilege and option" of moving forward if the appraisal comes in short, it's incredibly rare that an FHA buyer can make up an appraisal shortfall. Just like sellers and listing agents might assume an FHA buyer has a rock bottom FICO, they might also assume they are barely scraping together 3.5% down, since many do in fact multiply target sales price by 3.5% and save up exactly that much money, unaware of closing costs, that things break in homes after you buy them, etc.
Thanks for confirmation, which validates my posting.....They CAN do it, but many of them won't because they lack the funds beyond what FHA requires for a down payment.
SO that being said can anyone elaborate on the alternative to an FHA to get the low down payment?
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.
It's not the offer itself but preapproval letter from the lender specifies the type of financing.
No offer can be considered without POF or preapproval. Most diligent listing agent will call to the loan officer to verify the info and ask legally possible questions. If the seller is going to take house off the market while the buyer try to secure financing, it's a downtime for the listing. Real estate market is seasonal, so depends on the time of year, it might be critical.
Sometimes, seller agrees to go with weaker financially offer (FHA) but keep the house on the market until contingencies are cleared.
Besides, if I have one Showing a month on my listing, my seller is not going to be picky about the type of financing for prospective buyer. When the market is hot and I have 10-12 showings per week, there is no way the seller would accept FHA offer when there is another one might be coming. It's all depends on the market and time of the year.
IF the deal get closed, if doesn't matter....but it's a big IF to consider in May-June, when every day counts. When buyer will fail financing 40 days later, the house might be sitting on the market for quite few months or till next spring......or the price will have to go down.
SO that being said can anyone elaborate on the alternative to an FHA to get the low down payment?
I believe it was said before that you can get 3% down conventional loan.
Besides, your PMI will be gone once you hit 80% of equity line......unlike with FHA - that MI will stay until you refinance
You have several alternatives to FHA in the first couple of replies to this thread.
Fannie 97 is good (limited to 1st time homebuyer).
Fannie or Freddie 95 are two other good ones if the borrower can come up with the extra 1.5% down and has decent credit.
Do you need a decent broker in Florida? I can refer one if you want.
Stephanie
You have several alternatives to FHA in the first couple of replies to this thread.
Fannie 97 is good (limited to 1st time homebuyer).
Fannie or Freddie 95 are two other good ones if the borrower can come up with the extra 1.5% down and has decent credit.
Do you need a decent broker in Florida? I can refer one if you want.
Stephanie
Thank you everyone for your input I had no idea I even had alternative to an FHA. You guys/ladies are the best!!
Here is the wording from the FHAHANDBOOK online.
Conventional: In a typical real estate transaction, where a conventional (non-government-insured) home loan is being used, the appraiser is mostly concerned with the current market value of the property in question. That is his primary objective when visiting the house. He is only concerned with the condition of the property as it relates to the value.
FHA: When an FHA loan is being used, the appraiser has two objectives. The Department of Housing and Urban Development (HUD) requires him to determine the current market value, as with any appraisal. But they also require a property inspection to make sure the home meets HUD's minimum standards for health and safety. This is the "double duty" mentioned earlier. It's what makes the FHA appraisal process unique.
There are plenty of houses out there where paint outside is cracked around the window sills, possibly the entire garage. There may be a broken window, 3 steps going down without a handrail from the porch, 2 shingles blown off by the wind. Where the owner is not in a position to do anything with it. They could be elderly or out of town or just not have the money to pay a $1500 to get that stuff done. With a conventional loan those are non issues and the buyer will take care of that stuff after closing. With an FHA loan they become things that have to be done before closing. Or money held in escrow until it's done. Which of course means that depending on the bank they want a licensed contractor doing it. So if the property has a few little issues like that I would recommend not to take a FHA loan offer unless they wanted to deal with the escrow stuff or get it fixed.
As far as "livable" and "habitable" The house will pass FHA standards if you can't walk in without choking on cat smell, but if you have some chipped paint on a window sill it fails. The floors could be so uneven that you almost fall just walking around and it's OK but don't let it have a broken dishwasher.
Just my 2 cents.
With all due respect what you are quoting is not from the FHA Handbook (also more commonly known as the HUD Handbook). I think what you referenced is a blogging website that is quoting incorrect guidelines. The HUD HB does not reference any conventional mortgage guidelines including appraisal requirements. You can access the actual HUD HB here:
https://www.hud.gov/program_offices/housing/sfh/ha...
In regards to the difference between FHA and Conventional appraisals, yes there is a difference in that FHA has a higher standard for health and safety than Conventional. However there is not a seperate inspection required for an FHA appraisal. FHA appraisals do not require a home inspection contrary to what you cited above. The appraiser will always inspect the property for health and safety for both FHA AND Conventional. The difference is Conventional appraisal guidelines do not have as stringent guidelines as FHA does. Conventional loans also have a minimum standard they have to meet and the appraiser is going to note any issues in the home and can mark the property as "subject to" repairs, just as he/she would for an FHA loan. The only difference, as a I said, Conventional is not going to worry about minor health/safety issue like peeling paint, missing handrails etc. I have had many Conventional appraisals that have been made "Subject To" but for major issues like broken windows, cracks in the foundation, hole in the roof etc.
I hope this clears up any confusion.
Ok I concede,
From the original question: Why would a seller not accept an FHA loan?
There is no reason any seller should turn down an offer contingent on an FHA loan. They have just as good of odds of closing and without issue as a Cash offer or a 20% down Conventional loan.
Any agent in our MLS with (Cash/Conventional/Rehab loan) as purchasing options are wrong and should also be including FHA/USDA and VA as well or removing the conventional option.
I will tell you why. FHA, the seller has no clue if it will go through until the very end. I have talked to people who found out 3 days before settlement the buyer wasn't approved. The seller had already given her 3 weeks notice at work. She lost her job as a result of this. There are two set of eyes on this type loan. If the government doen't back it, your done. I have been waiting for a clear to close on my house from FHA. Today is 3 days before settlement, still nothing. Realtors who say it's not that bad are not being honest. It can turn into a mess. I will NEVER ACCEPT FHA AGAIN!!!!
As an investor selling to an FHA buyer, let me add another perspective. FHA now considers anything under 6 months ownership to be a flip. That means if the contracted price with its FHA buyer is more than 20% higher than what I, as the seller, paid for the property (guaranteed, otherwise it's not much of an investment!) then I (the SELLER) need to pay for a second appraisal automatically.
That's a $600 expense to me that benefits no one but the lender, and can devalue my property as the FHA will take the lower of the two appraisal values. Also, if you are selling a manufactured home, the FHA requires the seller to pay for tie-downs ($600-$1000). Yes, even if you already have an Affidavit of Affixure. No other lender I am aware of requires this. So you are looking at $1200 in totally unnecessary expenses in addition to have to make concessions to the buyer. No flip of mine will accept FHA buyers again.
I was throwing around google search terms looking for some perspectives on FHA financing and this post came up so I figured I would resurrect it and add some clarification on certain points so anyone else finding this can have accurate information.
Does an FHA appraisal "stick with the property"?
Yes, BUT only for FHA loans. When people have mentioned that in this thread they failed to make the distinction that the appraisal only "sticks" if the new buyer is getting an FHA loan also. It's been said that if you get an FHA loan it's a risk because it could "devalue" a property for up to 6 months and it has to be noted that the FHA appraisal value would only apply for a new buyer getting an FHA loan because FHA case numbers expire in 6 months. So, if someone gets a conventional loan then there is a new appraisal ordered and you wouldn't use any FHA appraisal previously completed.
If this puts a seller in a bind it's only in the case where the new buyer is going with FHA. Furthermore, if an appraiser says the property is worth $50,000 less than what it's listed for there is a reason. There are very few agents that have a better opinion of value and do more work determining that opinion than a certified real estate appraiser, which is why lenders require an independent, unbiased, 3rd party to do the work. I've had plenty of agents want to argue with me about a low appraisal and only a handful even try to do the work to provide actual evidence of why the appraised value is incorrect; you usually get a bunch of bellyaching and complaining but not much evidence to justify a value increase. Some agents try to provide proof and 99% of the time the appraiser's information is more accurate. Most of the time it's just that the agents are insulted, worried about the deal going through, they look bad to their clients that they got the value wrong by such a large margin, and the appraiser is basically calling them out on it. I've been pissed about appraisals before too; when I was just starting out I remember trying to challenge a few myself. Then I learned how to actually do the analysis the appraiser is doing and what guidelines are restricting that analysis. After a few hundred you begin to trust the analysis more than any real estate agent's valuation. A property is worth what someone will pay for it, I get that but it really only applies to cash deals that don't involve other people's money. If you want to set a new value with your cash go right ahead but if you're using other people's money they are the ones typically setting value.
As far as comments about FHA not going through or having problems closing you can put that all on the particular loan officer involved and their management not doing good enough quality control. QC is becoming a bigger and bigger issue as the cost of origination increases. If you have a lender not informing people that a deal isn't closing until 3 days before closing that is an issue the lender created. This is not specific to FHA and happens across all loan types with unprofessional "professionals". Many mortgage companies and MLOs are just bad at their jobs in general, like many real estate agents. People are people, real estate transactions are more complicated than collecting a commission and the barrier to entry just isn't that high for a 'salesperson' level license in real estate or mortgages. They didn't tell you until 3 days before closing because they are just bad at their jobs, don't knock FHA for that.
FHA is the whoops loan? I've heard this before. Again, there are borrowers that are borderline for any deal. This is not specific to FHA. If you've got a qualifying credit score 3 points above the threshold then it's the MLOs responsibility to properly coach their borrower through the next few months in finding a property. Proper coaching is key for most loans. Many of you would be surprised how many people do silly things like go out and finance a new car before closing so they can have a sweet new ride to go with their house. If you know how the process works inside and out then you can give people some pointers that will help in a variety of ways. MLOs should know these things but most don't and there again it comes down to people not being very good at their jobs and/or being inexperienced.
FHA loans are somewhere around 20% of the mortgage market in total. Roughly 80% of those are first time buyers. The FHA is a great program for a variety of reasons and nobody should be basing whether or not they take a deal strictly on whether or not it's financed by an FHA backed mortgage. Being financed by an FHA mortgage should be considered the same as financing with any type of mortgage because the confidence level in the financing going through should be based on the MLO and company involved and not the product type.