Yes, a home seller can refuse to sell to buyers using FHA (Federal Housing Administration) or VA (Veterans Affairs) loans.
Conventional loans tell the seller that the buyer is typically in a better financial situation and the time to close on the sale is faster. Other loan types are strict with different requirements, which might require more work from the seller before selling the house.
FHA loan denial reasons often include credit issues, like a low credit score below the lender's minimum requirement. A poor credit history can affect FHA loan approval, as on-time payments and responsible credit behavior are vital.
The property needs to be free of known hazards that affect health and safety, the home's use, or may affect the structural soundness of the house and its marketability. These include, but are not limited to: Toxic chemicals. Radioactive materials.
FHA loan rules specifically require the down payment to be buyer-funded, except for gift funds or other approved contributions from third parties with no financial gain in the transaction. The seller may contribute closing costs where applicable and permitted, but down payment funds cannot come from the seller.
The U.S. Department of Housing and Urban Development (HUD) wants to make sure you invest in a home that has long-lasting potential for your enjoyment and eventual resale. As such, HUD has strict guidelines that enforce which homes you're eligible to buy with an FHA loan. An FHA-approved home meets these guidelines.
The state of your credit will be an important factor in determining your eligibility for an FHA loan. If you've been through foreclosure in the last three years, or bankruptcy in the last two, you will not meet FHA qualifications and are not a candidate for an FHA loan.
The overall structure of the property must be in good enough condition to keep its occupants safe. This means severe structural damage, leakage, dampness, decay or termite damage can cause the property to fail inspection. In such a case, repairs must be made in order for the FHA loan to move forward.
Credit score requirements
Most first-time home buyer programs require a minimum credit score, often around 620, to qualify for conventional loans. However, some programs, like FHA loans, are more lenient, allowing scores as low as 580 or even lower with higher down payments.
FHA loans generally accept modest credit scores: Borrowers with lower credit scores or credit challenges are frequently approved. Conventional loans generally favor higher credit scores: Borrowers tend to need moderate to high credit scores to receive opportune loan terms and rates.
Given the potential speed and flexibility of the arrangement, seller financing may also help the owner attract more prospective buyers for their property. Sellers may skip making the kinds of repairs typically advised when preparing a property for sale.
Conventional conforming loans: 7.6% denial rate. Refinance loans: 24.7% denial rate.
FHA flipping rules are designed to protect buyers from predatory flipping practices. The primary rule is the 90-day flipping rule, which restricts FHA loans on properties resold within 90 days of acquisition.
Sellers often prefer conventional mortgages because they usually offer lower interest rates and the qualification requirements can be more lenient than those of an FHA loan. Additionally, with conventional loans, sellers may not have to pay private mortgage insurance or other upfront costs associated with an FHA loan.
Federal Housing Administration (FHA) loans have requirements, including minimum property standards, which help protect lenders and buyers. Homes financed with FHA loans must meet safety, security, and soundness standards, which include areas like roofs, electrical, water heaters, and property access, among others.
Health and safety concerns: Properties with potential health and safety hazards, such as lead-based paint, asbestos, or mold, may not qualify for an FHA loan. The FHA prioritizes the well-being of borrowers and aims to ensure that the homes they finance are safe and healthy environments for residents.
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.
Is It Hard to Pass a FHA Inspection? As long as the property meets the 3 minimum standards set by the HUD, it shouldn't be hard to pass a FHA inspection. To increase the property's chances of passing, prepare for the FHA inspection in advance. Check the property for hazards, broken systems or parts, and quality issues.
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.
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.
The borrower is responsible for paying for the FHA appraisal. The appraisal fee may be an upfront cost or wrapped into closing costs, depending on the lender.
The best way to find condominiums that the FHA has already approved is by using the condo search tool from the U.S. Department of Housing and Urban Development (HUD). With this tool, you can enter the state and county where you're searching for a condo. You can also enter the city, ZIP code or condo building name.