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.
Some home sellers see an FHA loan as a “riskier” loan compared to a conventional loan because of the FHA loan's stricter appraisal requirements. Also, the loan's lenient financial requirements for borrowers may leave the seller with a negative perception.
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.
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.
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 loan disqualifications often stem from poor credit (below 500), high debt-to-income (DTI) ratios (often above 43%), unstable employment, insufficient funds for down payment/closing costs, or issues with the property itself, like hazards or severe disrepair, plus owing back federal debts or having delinquent student loans. Clearing federal debt, establishing stable income, and ensuring the home meets safety standards are key to overcoming these hurdles, notes FHA.com and The Home Loan Expert.
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).
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.
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.
Why don't sellers like FHA loans? 3 Common Reasons Why
Denial rates vary by loan type, though. FHA loans had a higher denial rate at 13.6%, while conventional conforming loans had the lowest at 7.9%, showing some variation depending on the program you choose. Refinance applications tend to have higher denials, with an overall rate of 32.7% in 2023.
Quick insights. A home seller has legal rights to refuse an offer with an FHA loan, so long as the seller complies with the Fair Housing Act. When a seller has multiple offers to choose from, there are a few reasons they may decide against an offer with an FHA loan attached.
Uninsurable property is a home that is not eligible for insurance through the Federal Housing Administration (FHA) because it needs extensive repairs. An uninsurable property is typically ineligible for a mortgage through the FHA.
The FHA "12-month rule" generally requires borrowers to have a solid payment history, ideally with 12 consecutive months of on-time payments for all debts, especially housing, before applying for a loan, though some exceptions allow for limited late payments (like two 30-day lates in 24 months) or manual underwriting for extenuating circumstances. If a borrower has significant late payments (e.g., 3+ 30-day lates, or a 90-day late) within the past year, the loan may need to be downgraded or manually underwritten to assess if it was due to disregard for finances or extenuating situations like job loss or disability, requiring more documentation.
The 3-7-3 Rule in mortgages isn't a loan type but a federal timeline from the TILA-RESPA Integrated Disclosure (TRID) rule, ensuring borrower protection by mandating disclosures within 3 business days of application, a 7-business-day wait between the initial Loan Estimate and closing, and another 3-day wait if significant changes (like APR) occur, giving borrowers time to review costs before committing to a 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.
FHA allows seller concessions of up to 6% on a home's purchase price or appraised value, whichever is lower. “This is one of the highest allowed compared to other loan programs,” Barta says. This often becomes a negotiation point in real estate transactions.