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.
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.
The largest concern sellers have with FHA loans is the appraisal/inspection process. FHA loans have the reputation of having strict requirements for appraisals and inspections. The FHA has what they call 'Minimum Property Requirements,' if a property doesn't meet even one of them, financing falls through.
Common denial reasons include credit score issues, high debt-to-income ratio, and property appraisal challenges. FHA loans require a minimum 3.5% down payment for credit scores of 580 or above. Lower scores require a larger down payment. The median credit score for FHA loans is 673, indicating a “good” credit profile.
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.
FHA loans aren't inherently bad, but their main drawbacks are the mandatory, often costly Mortgage Insurance Premiums (MIP) that can last for the life of the loan (if low down payment), stricter property condition requirements (no fixer-uppers), and limits on loan amounts, making them less ideal for those with excellent credit or who want to buy investment properties. They're better for buyers with lower credit scores or smaller down payments but can cost more long-term than conventional loans for those who qualify for better conventional terms.
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 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).
FHA appraisal red flags buyers might not expect
A lot of what fails an FHA inspection is generally pretty logical: older, unmaintained roofs, broken windows, exposed or faulty electrical, potential lead paint hazards, unsafe steps, barely working heat.
Longer closing times: Because of some specific steps and possible repairs needed with an FHA loan-backed offer, the sale may take longer to complete. This can be discouraging to sellers, particularly those who want to sell their property as quickly as possible.
“When sellers put their home up for sale, they want to ensure that the deal will close quickly and without any unnecessary stress. With a conventional mortgage loan, the process is often more predictable.
For a $400,000 house, your down payment can range from $0 to $80,000, depending on the loan type and your financial situation, with 3.5% ($14,000) for FHA loans, 3% ($12,000) for conventional loans for some first-timers, or 20% ($80,000) to avoid Private Mortgage Insurance (PMI) on conventional loans, while VA and USDA loans can offer 0% down for eligible buyers.
Another aspect of this rule that's important to keep in mind--the seller may contribute six percent only for actual costs related to closing, interest rate buydowns, discount points or other concessions.
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.
Seller Assumes Responsibility for Repairs
This is commonly the most direct resolution to an appraisal issue. The seller consents to undertake and pay for all repairs specified by the FHA appraiser before the closing date. The seller should use qualified contractors to carry out the necessary work.
An FHA red flag is anything that compromises the safety, security, or soundness of a property. It could be a cracked foundation, a leaky roof, or even hazardous materials like lead paint. These issues can delay or even derail your financing.
Many people view cracked or peeling paint on or in a home to be a purely cosmetic issue, but that is not always correct. If a home was built prior to 1978, lead contamination could be an issue. FHA home loan rules require the seller to provide full disclosure of any known lead hazard.