Why Don’t Sellers Like FHA Loans? 3 Common Reasons Why
As a buyer, you might be curious as to why some sellers don’t accept FHA loan offers. Here are the top three reasons.
1. Stricter Home Inspection Requirements And Appraisal Concerns
When a home seller accepts an offer that’s financed by an FHA loan, they’re agreeing to meet a set of standards that conventional lenders aren’t always concerned about. The FHA loan process seeks to ensure that the house a buyer wants to purchase will make for a livable, safe and healthy home that will help the borrower grow their wealth and not lose their house.
Mortgages offered through the FHA follow appraisal standards set forth by the Department of Housing and Urban Development (HUD)’s appraisal guidelines, which are much more rigorous than the appraisal standards for a conventional mortgage.
To complete the mortgage process, the home has to go through a more extensive appraisal process to show that the home meets special FHA requirements. Although a home inspection isn’t required with FHA mortgages, the property must still be appraised by an FHA approved appraiser to meet the HUD’s minimum property standards for safety, security and soundness.
FHA Vs. Conventional Loan Standards
FHA appraisal standards differ from those ordered by conventional lenders.
In a standard appraisal, conventional lenders are looking to determine whether the value of the house is enough to act as security for the loan. In other words, if you default on the loan, your lender wants to be sure they’ll be able to sell the house to recoup their loss.
The government, however, wants to also help guarantee that home buyers only buy houses that are safe, livable and healthy. To make that happen, the three government agencies that insure home loans adhere to rules and requirements that other loan programs don’t.
FHA Appraisal Red Flags
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.
For example, if the FHA appraiser says your septic tank is approaching the end of its useful life, it will probably have to be replaced if you want the mortgage to be approved – even if it has been faithfully maintained and has had no obvious problems.
This can be a deterrent for sellers, leading them to reject an FHA loan offer.
Required Repairs
A seller may be required to make repairs to their home based on the findings of the FHA appraisal process if they want to move forward with the sale.
Required repairs are generally limited to those necessary to ensure:
- The health and safety of the occupants
- The security of the property
- The structural integrity, or soundness, of the home
FHA Livability Standards Can Cost Sellers
Sellers are required, to the extent mandated by law, to complete Seller’s Disclosure forms when selling their home. They’re under no obligation to look for problems, only to disclose known issues.
If the FHA appraisal process reveals new problems and the home loan is denied, sellers will likely have to relist their home and disclose the newly discovered problem to future prospective buyers. Something most sellers in a hot market won’t be willing to deal with.
2. Lack Of Earnest Money And Down Payment
Home sellers can sometimes be dazzled by offers accompanied by large earnest money deposit checks. Unfortunately, the typical home buyer using an FHA loan is unlikely to have excess cash upfront.
Cash Is King
If a home buyer has less cash to put toward a down payment, they may be less likely to be approved for a mortgage, depending on the state of their finances. If a buyer does have a good amount of cash saved up, however, a large down payment can go a long way in easing a lender’s concerns about past credit problems.
Your earnest money becomes part of your down payment, so it really doesn’t make a difference to sellers in terms of the proceeds of the sale. Sellers know, however, that the more cash you’re able to offer in the beginning, the more likely it is that you’ll go on to be approved. For sellers looking for a silky-smooth transaction, cash can be a powerful motivator.
3. Longer Time To Close
Finally, because of the added requirements and government oversight, FHA loan approvals often take longer than on conventional mortgages. That means sellers who accept FHA loans will often have to wait longer to get to the closing table.
