FHA loans are less desirable for sellers. There's a lot of extra complexity and longer wait times for things compared to conventional. I accepted an FHA offer on a house I sold a few years ago and it was more of a hassle because of the extra requirements the bank expects compared to a conventional loan.
Some reasons a seller might refuse an FHA loan include misconceptions about longer closing times, stricter property requirements, or the belief that FHA borrowers are riskier.
Conventional Loans: In 2022, conventional loans had a denial rate of 7.6%, significantly lower than the FHA's 14.4%. Conventional loans, not backed by the government, typically have stricter credit and income requirements.
FHA Loan: Cons
Here are some FHA home loan disadvantages: An extra cost – an upfront mortgage insurance premium (MIP) of 2.25% of the loan's value. The MIP must either be paid in cash when you get the loan or rolled into the life of the loan. Home price qualifying maximums are set by FHA.
Since your home must meet FHA property minimums, the appraisal process may include more requirements than a conventional home loan. The appraisal is required to be performed by an FHA approved appraiser and may have additional inspections which could result in a higher appraisal cost.
If you're currently in the market looking to buy a triplex or fourplex with FHA financing, you need to see if the property's rents pass the Self-Sufficiency Test. To be “self-sufficient” means that 75% of the property's rents need to cover the monthly payments.
You may be denied for an FHA loan if you have declared bankruptcy but you have not had the bankruptcy discharged. You may be denied if you are delinquent on federal taxes or otherwise owe money to the federal government but without an approved payment plan.
All FHA loans used for a home purchase require an independent property appraisal. The appraised value must be at least the same as the sales price. If the appraisal comes in lower, the borrowers must either come up with more money to make up the difference or have the home seller reduce the sales price of the home.
A major benefit of a conventional loan is that the buyer often has higher credit ratings and more capital available for a down payment than with an FHA loan. On the other hand, FHA loans may be attractive to some sellers since they only require a small downpayment and have traditionally lower closing costs.
Reasons for an FHA Rejection
There are three popular reasons – bad credit, high debt-to-income ratio, and overall insufficient money to cover the down payment and closing costs of a home.
In some ways, an FHA loan could make it easier for you to buy a home, especially if you don't have a lot of money saved for a down payment. In other ways, an FHA loan might make it harder to buy a home, especially if you're in a competitive housing market where simultaneous offers are common.
FHA Underwriting Worries Some Sellers
One reason a seller might refuse your FHA-backed offer is that they believe the home sale may be more likely to fall through due to the FHA loan program's more lenient underwriting requirements.
Must have an undamaged exterior, foundation and roof. Must have safe and reasonable property access. Must not contain loose wiring and exposed electrical systems. Must have all relevant utilities, including gas, electricity, water and sewage functioning properly.
An FHA loan may be a better option if you have a lower credit score, a higher DTI ratio, or less money saved for a down payment. On the other hand, a conventional loan may work better if your finances are sound and you can qualify for favorable loan terms.
The FHA's three requirements are that a property must be safe, secure, and structurally sound to qualify for one of their loans. Properties cannot have adverse conditions that might imperil the homeowner, and must meet proper building codes. As a buyer, these standards protect you from buying an unsafe property.
But the main goal is to evaluate whether the home is in good condition and if it's safe and livable for the borrower. Although the FHA minimum property requirements are strict, they're not prohibitive. In fact, most homes will pass an FHA appraisal, so don't let these requirements scare you off FHA loans.
Down payments and gift funds
The minimum down payment required for an FHA loan is 3.5% if you have a credit score of 580 or higher. If you have a credit score from 500 to 579, you'll have to put down at least 10% of the purchase price.
FHA-specifics
If you can show proof that you have now been employed for at least a six-month period before requesting a FHA loan, AND that before any employment gap you worked for two-years straight or longer, you have the potential to get approved.
If you plan to purchase a flipped home with an FHA loan, you must abide by the FHA 90-day flipping rule. This rule states that a person selling a flipped home must own the home for more than 90 days before home buyers can purchase the property.
Why? They feel that buyers who can secure any other financing option are 'stronger buyers. ' FHA buyers have a reputation for having low credit scores, little money to put down, and less than optimal qualifying requirements. Sellers want a 'sure thing' when they sell their home.
Perhaps the biggest downside of taking out an FHA loan is that you're stuck paying mortgage insurance premiums (MIPs) for the life of your loan. MIP consists of two parts: the up-front mortgage premium, which is 1.75% of your base loan amount, and the annual MIP, which depends on various factors.
Roll the costs into your loan Yes, closing costs can be included in your loan amount if your lender offers a no-closing cost loan. → How to finance FHA closing costs on a purchase loan: Increase your interest rate and ask the lender to pay the fees, or increase your loan amount to pay them.