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.
Lack of Confidence
Some believe going through someone whose qualified for a conventional loan will close quicker and have less obstacles along the way. Although this isn't true, which its closing success is nearly identical to conventional loans, some sellers still view buyers with FHA loans as riskier.
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.
But the minimum standards for a home's condition are stricter for an FHA loan, Yates said. Sellers will have to make the repairs necessary to meet these minimum standards before the sale can close. This can scare some sellers away from FHA buyers, especially when they have more than one offer on their residences.
Home sellers sometimes prefer conventional loans due to the stricter appraisal that's required with an FHA loan. An appraisal for an FHA loan might dig up more issues with the home, which in turn can delay the home sale process as the seller works to fix them.
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.
There is also a perception by sellers that house-hunters utilizing conventional lending have better credit and are thus more reliable than other buyers, as conventional loans tend to require higher credit scores and larger down payments.
Whether you're interested in a listing or touring an open house, here's a list of things buyers can look for that may be considered red flags to an FHA appraiser: Missing handrails. Cracked windows. Termite damage.
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.
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.
Cash purchases allow buyers to make an offer on any property
VA home loans and FHA loans have minimum property requirements, and USDA loans come with geographic and property type restrictions. But when buyers pay cash, they can move forward on the property they want, regardless of program limitations.
Because FHA closing costs include the upfront MIP, an FHA loan can have average closing costs on the higher end of the typical 3% – 6% range. That doesn't diminish in any way the value of getting an FHA mortgage, with its low down payment, lower interest rates and flexible underwriting.
Down Payment Requirements for an FHA Loan
Generally, lower credit scores are riskier for the lender. But borrowers are less likely to default on a mortgage if they have considerable equity in the home. So, lenders control some of their risks by raising the down payment requirement when a borrower has a lower score.
What was the specific cause of this increase? It came on the heels of a federal funds interest rate hike ordered by the Federal Reserve. The Fed ordered this increase as a control on inflation. The Fed does NOT set mortgage rates, but setting the federal funds rate higher indirectly influences mortgage rates.
For borrowers with good credit and a medium (10-15 percent) down payment, FHA loans tend to be more expensive than conventional loans. For borrowers with lower credit scores or a smaller down payment, FHA loans can often be the cheapest option.
An FHA loan is a government-backed conforming loan insured by the Federal Housing Administration. FHA loans have lower credit and down payment requirements for qualified homebuyers. For instance, the minimum required down payment for an FHA loan is only 3.5% of the purchase price.
You won't be able to avoid mortgage insurance: Everyone pays upfront mortgage insurance premiums with an FHA loan. For annual MIP, if you put down less than 10 percent, you'll pay it for the life of the loan. If you put down at least 10 percent, you'll pay annual MIP for 11 years, or until you refinance or sell.
Exposed concrete, concrete flooring or concrete floor that is acid stained or painted is no longer acceptable flooring. It is considered to be exposed foundation to FHA and must be covered with a finished, marketable flooring.
The safety checks that are done as part of an FHA appraisal have to do with whether the property is move-in ready. If there are exposed floorboards or the utilities don't work, that can be a health and safety issue. We'll get into some FHA-specific standards a little bit below.
While FHA loans make it easier to buy a home, they have several downsides that you should consider before applying for one. Borrowers who take out FHA loans will likely face higher costs upfront and with every payment, and it could signal that they aren't ready for a mortgage.
It takes around 47 days to close on an FHA mortgage loan. FHA refinances are faster and take around 32 days to close on average. FHA loans generally close in a very similar timeframe to conventional loans but may require additional time at specific points in the process.
Buying a house is much easier with cash. You don't have to wait for an inspection, appraisal, or underwriting. Home sellers will also usually favor cash buyers so they don't have to deal with lending timelines, which means your cash offer is more likely to be accepted.
A home seller may even prefer an FHA buyer over a conventional buyer. For example, since FHA loans have more lenient credit and down payment requirements, it makes them accessible to a larger pool of buyers, meaning higher chances of the home selling quickly.
To qualify for a conventional loan, you'll need a credit score of at least 680. Borrowers with credit scores as low as 580 may be approved for an FHA loan. If your credit score is lower, you may still qualify, but you will need a minimum of 10% of the home's value for a down payment.