Buyers love FHA loans for their flexible guidelines and low down payment requirements. You can even use gift funds for 100% of your down payment in some cases.
But sellers don’t love them as much. In fact, some sellers won’t accept an FHA offer.
Many sellers look at FHA loans as ‘the last resort.’ They assume buyers are ‘weak’ or barely qualify for financing. They worry the financing will fall through and they’ll be stuck putting their house on the market again.
While that reputation still lingers (even though it shouldn’t), let’s dig a little deeper.
How Do FHA Loans Affect Sellers?
The largest concern sellers have with FHA loans is the appraisal/inspection process. FHA loans have the reputation of having strict requirements for appraisals and inspections. The FHA has what they call ‘Minimum Property Requirements,’ if a property doesn’t meet even one of them, financing falls through.
This is above and beyond what a typical appraisal does – determine the property’s market value. Most lenders use the appraisal to make sure the home’s value is there so that there’s enough collateral. The FHA takes it a step further to protect the buyer – they make sure the home is safe, sound, and sanitary and many sellers don’t like the nitpicking the FHA does on the property.
FHA loans also have the most lenient guidelines regarding closing costs. Many people mistakenly think sellers MUST pay FHA closing costs, but they don’t. While they can, it’s not a necessity. Many FHA borrowers, however, need it and will ask. Since the FHA allows sellers to contribute up to 6 percent of the loan amount, of course, buyers will ask for help.
Why Do Sellers Prefer Conventional Financing Over FHA Loans?
Many sellers prefer conventional financing or any financing over FHA loans. Why?
They feel that buyers who can secure any other financing option are ‘stronger buyers.’ FHA buyers have a reputation for having low credit scores, little money to put down, and less than optimal qualifying requirements.
Sellers want a ‘sure thing’ when they sell their home. They don’t want a ‘risky’ buyer that may lose financing in the middle of the process, forcing the buyer to put the home back on the market.
Can A Seller Refuse An FHA Loan Offer?
A seller has the right to refuse any offer, including FHA offers. Sellers refuse offers for a variety of reasons including:
- The offer isn’t high enough
- The buyer wants too many contingencies
- The buyer isn’t putting enough money down on the home
- The buyer doesn’t have solid financing secured yet
- The seller doesn’t like the buyer’s financing options
Alternatives To FHA Financing
If you don’t qualify for conventional financing because your credit scores are too low, but FHA financing isn’t an option because you’re buying an investment property or sellers in your area don’t like it, you have options.
Look at hard money lenders for your financing needs. Despite the name (and the reputation they have), hard money loans are a great way to start investing in real estate. If you have some of your own funds to invest (skin in the game), average credit, and stable income, you’re well on your way to getting approved for a hard money loan.
Hard money loans have a variety of benefits including:
- Flexible underwriting guidelines – The focus is on the property, not the individual, making it easier to get financing
- Faster funding – Hard money loans often fund within 7 days so buyers can make offers with faster turnaround times, which many sellers want
- Fewer property requirements – As long as the home is worth as much as you bid, you have a good chance of approval, hard money lenders don’t require specific property guidelines
What’s The Best Option?
FHA loans are great for first-time homebuyers with little money to put down and less than perfect credit. If you have any money to put down on the home, average credit, and otherwise good qualifying factors, you have other options.
If you want a seller to accept your bid, you need reputable financing and a large down payment. Sellers want ‘skin in the game’ because it gives you a better chance of loan approval and giving the seller what they want for the home.
While FHA loans aren’t a ‘bad option’ they aren’t the best, especially if you’re investing in a home. FHA loans are only for owner-occupied properties. Other financing options provide greater results for real estate investors.