Sellers often dislike FHA loans due to concerns about stricter property requirements (requiring costly repairs), longer/more complex closing processes, and the perception that FHA buyers are riskier or less financially stable than conventional loan borrowers, leading to a fear of the deal falling through, especially in competitive markets. These factors can make FHA offers seem less appealing compared to conventional offers for a smoother, faster sale with fewer potential issues, say agents on social media platforms like Facebook.
It all comes down to risk. An FHA financed offer is riskier to the Seller than a Conventional loan or an ARM. Try writing FHA with an Appraisal Gap or the Buyer will take care of Inspection items up to (fill in the blank) amount. Those things help mitigate that risk in the FHA appraisal.
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)
FHA loans aren't suitable for everyone, and the requirements may be more stringent than conventional mortgages for some buyers. They're also not ideal for buyers with good to excellent credit, as these buyers may be able to secure better rates and terms with a conventional mortgage.
Because of the strict appraisal requirements and potential for longer closing times, an FHA loan may make your offer less competitive to sellers compared to buyers with conventional loans. This typically occurs in competitive real estate markets where sellers are reviewing multiple offers at once.
Cracks in the foundation, signs of water damage, or evidence of settling can raise red flags. These issues often require a structural engineer's inspection, which can add time and cost.
FHA loans are designed to help make homeownership more affordable for Americans with moderate incomes or lower credit scores. But like any mortgage, FHA loans require the borrower (or seller) to pay closing costs, even though they're backed by the U.S. Federal Housing Administration (FHA).
A FHA Loan could be a good option for first-time home buyers of those with limited funds for a down payment and a lower credit score. Nevertheless, there are also some drawbacks to consider as well like private mortgage insurance.
FHA loans allow early repayment without prepayment penalties so borrowers can pay off their loan ahead of schedule without added fees. If that's your goal, strategies like extra payments or refinancing may help.
Some sellers still look at FHA loans negatively, viewing them as loans of last resort for borrowers with weak credit. They worry that FHA deals are less likely to close because of this.
The FHA 85% rule refers to a past guideline for cash-out refinances limiting the loan to 85% Loan-to-Value (LTV) and a specific rule for identity-of-interest transactions (like buying from family) where borrowers couldn't finance more than 85% of the home's value unless exceptions applied, such as renting from the family member for at least six months prior. While the general cash-out LTV is now 80%, the 85% rule still applies to certain related-party sales, requiring a 15% down payment unless an exception is met, notes FHA.com.
FHA allows you to only have one loan at any given time. Therefore, if you plan to sell one home and buy another, you may do so as long as you are paying off the existing FHA loan in order to purchase your new home with yet another FHA loan.
Final thoughts for buyers
While FHA loans can provide increased accessibility for many homebuyers, they may not be the best fit for those looking to purchase a non-primary residence, properties that don't meet FHA inspection requirements, or homes that exceed loan limits.
The main cons of FHA loans are mandatory Mortgage Insurance Premiums (MIP) – both upfront and annual, which can last for the life of the loan or 11 years depending on down payment. Other downsides include strict property standards, lower loan limits in high-cost areas, higher long-term costs (especially with good credit), and limitations to primary residences only, which can make them less appealing to sellers and buyers with excellent credit seeking better conventional loan terms.
For a $400,000 home, expect closing costs to generally fall between $8,000 to $24,000 (2% to 6% of the home price), though it can vary by location and lender, with some estimates placing typical costs around $8,000 to $12,000 (2% to 3%) for fees, plus prepaid items like taxes and insurance, leading to a total cash needed closer to $12,000-$15,000. Key costs include loan origination, appraisal, title, property taxes, and insurance, with higher percentages often seen on lower-priced homes due to fixed-cost fees.
Key takeaways. FHA loan closing costs typically total 2 percent to 6 percent of a home's purchase price and are charged in addition to the down payment. FHA closing costs include an upfront mortgage insurance premium (MIP), lender and third-party fees and prepaid expenses.
The "3-3-3 rule" in real estate isn't a single guideline but refers to different strategies: for buyers, it's about financial readiness (3 months savings, 3 months reserves, 3 property comparisons) or a financial affordability check (30% income, 30% down, 3x income); for agents, it's a marketing habit (call 3, note 3, share 3) or prospecting (talking to everyone within 3 feet). There's also a developer rule (1/3 land, 1/3 build, 1/3 profit), though it's considered outdated by some.