Can A Seller Refuse Your FHA Loan, And Why?
Miranda Crace6-minute read
October 24, 2021
When going through the home buying process you may expect a few hurdles along the way, but would you ever expect that a seller wouldn't accept your offer simply based on the type of loan you have? If you're buying a home with an FHA loan, you may experience just that.
Before you start reconsidering your loan options, know that there is nothing inherently wrong with an FHA loan. In fact, these loans – also known as 203(b) loans – are quite popular and are a great option for many home buyers.
The decision to turn down an offer simply because the loan is FHA is a decision from the homeowner that may be based on negative assumptions about the borrower, insecurities about their own home or just a lack of knowledge on this type of loan.
To better understand the seller's intentions, reasoning and perhaps how to change their mind, let's take a look at what an FHA loan is, and the reasons why some sellers wouldn’t accept one.
What Is An FHA Loan?
An FHA loan is a home loan that’s insured by the Federal Housing Administration (FHA), a government agency. This loan option, along with USDA and VA loans, is popular among first-time home buyers and those with less than stellar credit because of its lower income and credit score requirements.
Why Do Some Sellers Not Accept FHA Loans?
Sellers want to be able to sell their home with as little frustration and cost to them as possible. Anything they believe may pose a risk to the perfect sale may send them running in the other direction.
Unfortunately, some home sellers see the FHA loan as a riskier loan than a conventional loan because of its requirements. The loan's more lenient financial requirements may create a negative perception of the borrower. And, on the other hand, the stringent appraisal requirements of the loan may make the seller nervous.
Take a look below at some reasons why a seller wouldn’t accept an FHA loan:
Underwriting Process Anxieties
Because conventional loans have a higher bar for approval, sellers automatically think that someone with a conventional loan is in a better financial position to purchase the home. As unjustified as it may be, some sellers may hold a negative perception of an FHA borrower simply because they didn't have to meet the higher requirements.
They may fear that a deal will fall through during the underwriting process, which is when credit and income are verified and assets and credit history are reviewed. They worry that financial problems or other red flags will come up in the process, causing the buyer to withdraw their offer.
While someone may get an FHA loan because they have a lower credit score or are only able to afford the minimum down payment, or because they couldn't qualify for another loan, it doesn't necessarily mean they are in dire straits or have major financial problems.
What the seller must remember is that the buyer has already gone through a preapproval process in which the lender has checked their credit and verified certain documents to give the go-ahead on their loan amount.
Preapproval is a thorough process that requires proof of income, proof of employment and other types of documents like a driver's license or Social Security card, so sellers shouldn’t worry about borrowers skating by credit requirements.
FHA Appraisal And Inspection Concerns
FHA appraisals differ from conventional loan appraisals in that they require an assessment of the property in addition to determining the value of the home. The primary focus during an FHA appraisal isn't the home's value. Instead, it's health and safety.
During the assessment, the property must meet the minimum requirements of the Department of Housing and Urban Development (HUD). If it doesn't, the deal could be put on hold until the issues are corrected. This can be problematic for sellers in a few ways.
For one, it can slow down the sale of the home. Of course, there are also costs. Depending on the purchase agreement with the buyer, the seller may have to pay for the required repairs or the buyer may have to do it.
The seller may be concerned that the buyer won't be able to afford the repairs needed to complete the sale, which may cause them to withdraw their offer or request the seller pay for the repairs instead.
An even bigger concern sellers may have with an FHA appraisal is that the assessment could uncover a significant problem with the home – one they may or may not know about already. This could give the seller a bigger problem than not being able to sell the home to you.
If the problem is substantial enough, they may not be able to sell their home to anyone. Examples of such problems include structural damage, a wet basement, major electrical issues or substantial damage to the roof.
So are the seller's concerns warranted? It depends. The amount of FHA loans that successfully close in 90 days is actually quite comparable to that of other loans.
In fact, about 73% of all FHA loans successfully close within 90 days, according to Ellie Mae's Origination Insight Report from May 2019. For comparison's sake, about 75% of all conventional loans successfully close within 90 days. That's only a 2% difference.
Now if the seller knows there is an issue with the home that they are not disclosing, then their concern is warranted. That's because whatever problem they do not want exposed could be a dealbreaker or a costly repair.
That is why you should be wary if a seller will not accept an FHA loan, especially if they cannot give you a reason why.
What To Do If The Seller Won't Accept Your FHA Loan
Whatever their reasoning, a seller is not legally required to accept a certain loan if they don't want to. However, you may be able to work with them to better understand where they are coming from and find an agreement you are both comfortable with.
Just make sure you explore all of the options you have and decide what’s best for you, not the seller.
Find Out Why They Won't Accept Your FHA Loan
You can find out a lot by simply asking "why?" And if you're lucky, the seller may give you an answer. If they have reasonable concerns, you may be able to come up with a solution.
You could try sweetening the deal, showing the seller you are financially stable by doing one of the following:
- You can make an earnest money
- You could waive seller concessions.
- Make a no-contingency offer to them.
If they don't give you a legitimate reason or refuse to answer at all, then be cautious. They could be trying to cover up a defect with the house.
If you want to move forward in the process anyway, take necessary precautions to make sure you don't get ripped off. This may include doing your own research on the home, reading the housing disclosures with a critical eye and requesting a thorough home inspection alongside a highly rated, professional inspector.
Remember, HUD requires an appraisal, not an inspection, though it is highly recommended. You'll have to order that on your own.
When you walk through the home, do your own in-depth inspection as well. Look for things like exposed wires, cracks in the walls and signs of water in the basement (such as stains on the walls, mold and efflorescence), and other things that would fail a home inspection.
Consider Your Options
When a seller won't accept your FHA loan, you have a few options. If they are concerned about the home not meeting HUD guidelines and don’t want to pay for the repairs, you can offer to buy the home as-is, meaning you accept certain defects the FHA finds in the appraisal and agree to purchase the home without any repair. The seller will not have to fix them before handing over the keys and they will become your responsibility once you take ownership.
If you qualify, you could also opt for a conventional loan instead. These loans can allow for lower down payments, too, but anything under 20% will require you to pay for private mortgage insurance (PMI). To qualify for this type of loan, you will need a credit score of 620 or higher and a debt-to-income ratio (DTI) of 50% or less. If you’re not confident in your credit score, you may have the option to have a co-signer on your mortgage loan.
If neither you nor the seller is willing to budge, it may be time to withdraw your offer, walk away from the home and start a new search. While it can be frustrating, it may save you stress and money.
And who knows, you may be able to find a better home with the type of loan that is right for you, and that you are most comfortable with.
Talk To Your Home Loan Expert
However you choose to proceed with the home buying process, you should work with a lender that will be with you every step of the way. Before making a decision on next steps, chat with your Home Loan Expert to have your questions answered and to see what options you have available. You should also speak to your real estate agent regarding any complications with the transaction itself.
The Bottom Line
If an FHA loan is a good fit for you, don't sacrifice the right loan for a home that may not be worth it. While there are some sellers who carry a bias against this type of loan, there are plenty of those who are happy to accept an FHA mortgage.
Read about first-time home buyer programs to see what other resources might be available to you.
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