Sellers often prefer conventional buyers because of their own financial views. Because a conventional loan typically requires higher credit and more money down, sellers often deem these reasons as a lower risk to default and traits of a trustworthy buyer.
Sellers are wary of FHA loans because they believe their property will have to pass a level of scrutiny that conventional loans don't. FHA indeed has minimum property requirements (MPRs) that don't apply to other loans.
FHA is generally better for people who don't have as much cash in savings. Allows for smaller down payment with some caveats (insurance for the entire life of the loan). Conventional is better if you have more savings and therefore can put more money down.
FHA Loan: Cons
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. Interest rates are higher than with conventional loans (based on relaxed borrower eligibility requirements)
With FHA loans, you also have to pay an upfront mortgage insurance fee. This can be financed, but it will cause your mortgage insurance payments to be more expensive than with a conventional mortgage. Inspection standards: To qualify as an FHA-eligible property, a home must go through a property standards inspection.
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.
It's often easier to qualify for an FHA loan than for a conventional loan because buyers can have a credit score as low as 580 and a debt-to-income (DTI) ratio of 50% or lower. However, applicants with a lower credit score and higher DTI ratio may still qualify for an FHA loan.
Drawbacks include stricter requirements to qualify, large payments if market rates increase, lack of 5% equity requirement, and additional fees if borrower has a less than excellent credit score.
One of the main advantages of FHA loans is the lower down payment requirement. With a credit score of 580 or higher, you could qualify for a down payment as low as 3.5%. Even with a credit score between 500 and 579, you might only need a 10% down payment.
Unfortunately, sellers often perceive the FHA loan approval process as risky because of the FHA's relatively lenient financial requirements and stricter appraisal and property standards.
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.
Common reasons for FHA loan denial include low credit scores, high debt-to-income ratios, insufficient income, insufficient funds for a down payment, and properties not meeting FHA guidelines.
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.
These loans are perfect for borrowers with a strong credit history and the funds for a more substantial down payment. Conventional loans offer the ability to avoid the costs of mortgage insurance while also giving borrowers the option of fixed or adjustable rates.
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.
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.
Which loan is better: FHA or conventional? To a large extent, that depends on you and your financial profile. Generally, a conventional loan is best for those with strong credit and a bigger home buying budget. If your credit score is below 620, a loan backed by the FHA might be your only option.
Generally, closing costs are similar between FHA and Conventional loans, but an important thing to consider is that FHA loans universally require an upfront Mortgage Insurance Premium payment of 1.75% of the loan amount.
In most cases, you'll need a credit score of at least 620 to qualify for a conventional loan. When you apply, your lender will check your credit history to determine if you have qualifying credit. If you don't, you might not get approved for the loan.
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.
Your escrow payment might go up if your property taxes change, your homeowners insurance premium increases or if there was an escrow shortage from the previous year.