Anything that affects the health and safety of the home will be a problem that the seller will likely need to resolve before the loan can be approved. That includes any non-working system in the home, particularly electrical, HVAC, plumbing, water supply and wastewater removal issues.
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.
Despite the lenient FHA loan requirements, it is possible to be denied. The three primary factors that can disqualify you from getting an FHA loan are a high debt-to-income ratio, poor credit, or lack of funds to cover the required down payment, monthly mortgage payments or closing costs.
The FHA's three requirements are that a property must be safe, secure, and structurally sound to qualify for one of their loans. Properties cannot have adverse conditions that might imperil the homeowner, and must meet proper building codes. As a buyer, these standards protect you from buying an unsafe property.
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. You'll also have to pay mortgage insurance, and FHA loans are less flexible than conventional loans.
The Bottom Line: Sellers Can Refuse FHA Loan Offers
Until then, striving for conventional loan approval may be a more straightforward option, if it's financially possible for you. Ready to take the next step toward homeownership?
Reasons for an FHA Rejection
What are the other factors that could contribute to the lender not approving the FHA loan in the end? There are three popular reasons – bad credit, high debt-to-income ratio, and overall insufficient money to cover the down payment and closing costs of a home.
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.
Structural issues include problems with the foundation, load-bearing walls, or roof. Signs of structural damage might consist of large cracks in the walls or foundation, uneven floors, and doors or windows that don't close properly. Roof Problems: A roof in poor condition can lead to leaks, water damage, and mold.
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.
In general, it's easier to qualify for an FHA loan than for a conventional loan, which is a mortgage that isn't insured or guaranteed by the federal government. Here are some key differences between FHA and conventional loans: Credit score and history: FHA loans allow for lower credit scores than conventional loans.
No, FHA loans don't have a set minimum income requirement. However, lenders will assess your income in relation to your monthly debts. They'll look at your debt-to-income ratio (DTI) to determine if you can manage your mortgage payments.
This comparison can offer valuable insights for borrowers as they navigate their mortgage options. Conventional Loans: In 2022, conventional loans had a denial rate of 7.6%, significantly lower than the FHA's 14.4%.
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.
FHA appraisal and inspection checklist
Must have an undamaged exterior, foundation and roof. Must have safe and reasonable property access. Must not contain loose wiring and exposed electrical systems. Must have all relevant utilities, including gas, electricity, water and sewage functioning properly.
Yes, the bank can refuse any partial payment that does not bring the loan current. You are required to pay the monthly amount specified under the terms of your loan contract.
If you have outstanding collections, your lender may want evidence that you've entered into a repayment plan. If this evidence cannot be obtained, then your lender will have to calculate a monthly payment of 5% of the outstanding balance and calculate that amount into your debt-to-income ratio.
Passing an FHA home inspection is harder than passing other types of home inspections because if the inspector identifies serious problems with the property, those problems will have to be dealt with before you can secure a loan.
Leaking Roof: Must be repaired or replaced. Leaking Pipes: Leaks must be corrected professionally. Heat Sources: Central heating capable of maintaining 50°F in all areas of the house is required. Flooring: Acceptable floor coverings are necessary; plywood is not acceptable.
The Bottom Line
Your underwriter will ask for documents like tax returns and bank statements. They will look at your income, assets, debt, liability and credit report before giving you an approval or denial.
If your spouse has a bad credit score, it will not affect your credit score. However, when you apply for loans together, like mortgages, lenders will look at both your scores. If one of you has a poor credit score, it counts against you both. You may not qualify for the best interest rates or the loan could be denied.
New loan limits are set on FHA loans every year, going into effect January 1. For the year 2024, the FHA loan max amount for high-cost metropolitan areas sits at $1,149,825, or drops to $498,257 in areas with lower housing costs. The limit applicable to you will depend on where your property is located.
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.
If you're looking to remove a borrower from your loan, an FHA Streamline refinance can be a great way to do it. With no appraisal, income documentation, or credit report required, this option saves you time and money compared to a traditional refinance.