For first-time homebuyers entering the real estate market, an FHA loan is an attractive option for an affordable residential mortgage for a number of reasons including lower credit score and down payment requirements.
The same features that make the FHA loan program so attractive for buyers doesn’t always seem so great from the seller’s perspective. When sellers learn that an offer is made from an FHA borrower, some get nervous. However, the reality is that many FHA borrowers are just as qualified and reliable borrowers as conventional mortgage borrowers. In fact, according to mortgage origination software company Ellie Mae, 70% of FHA loan applications from the previous 90 days were closed in Sept. 2017, only slightly below the conventional loan closing rate of 71.8%.
Here are some concerns sellers have about FHA loans and the truth behind them:
Concern No. 1: FHA borrowers have bad credit
FHA loans are available to those even with credit scores in the 500s or with no credit history at all. While this is good news for prospective homebuyers, sellers may worry that people with such low credit will encounter problems in the underwriting process, FHA Handbook explained. A poor credit score is generally regarded as a sign that someone is a more risky borrower.
If a seller accepts an offer from a buyer who then gets turned down for a loan during the underwriting process, the seller will have to try again to find a qualified buyer. Many times, a seller would rather the first buyer work out and move on with the sale.
FHA Handbook pointed out this shouldn’t be a major concern for sellers; many FHA borrowers successfully obtain their loan in the end and are able to make the purchase.
Concern No. 2: The FHA requires a home inspection
An appraisal is needed for almost all home sales. The appraisal process simply means that an expert reviews key information and determines how much the property is worth. An FHA appraisal is a little bit more involved: In addition to determining the value of the property, an FHA appraisal also includes an inspection to make sure the home is compliant with the Department of Housing and Urban Development’s minimum health and safety standards, according to FHA Handbook.
If a seller has, for example, an air conditioner that’s broken and doesn’t have the funds to repair or replace it, the home won’t pass the FHA appraisal. If this happens, the seller must:
- Pay for a new air conditioner or for the appliance to be repaired.
- Schedule for a second inspection, and perhaps pay for it as well.
Sellers aren’t keen on this extended appraisal process, nor are they excited to spend more money on the sale of their homes. Some think it’d be easier to simply say “no” to the FHA offer in favor of a buyer with a conventional mortgage.
Concern No. 3: FHA borrowers can’t afford home upgrades or a large down payment
The low down payment is a big draw for people seeking out an affordable home mortgage. However, sellers worry about buyers who appear to be strapped for cash. Sellers wonder whether the buyer will expect the seller to make extensive home repairs as a condition of the sale. Additionally, if the home inspection turns up a problem with the home that the buyer can’t afford to remedy after moving in, the seller might ponder whether the buyer will back out as a result.
Another concern is the appraisal showing that the home is overvalued, Bankrate explained. A buyer who doesn’t have a lot of cash may want to negotiate a lower sale price when this is the case – something most sellers don’t want to do. However, this may not be an issue if the buyer is willing to make the same down payment regardless of price or is willing to accept the original sale price of the home.