Can a Seller Refuse an FHA Loan?
What you'll learn: Are FHA Loans Good or Bad?
EXPECTED READ TIME: 9 MINUTES
December 23, 2021
Let’s answer the question — Can a seller refuse an FHA loan? Yes, they can just as they can refuse a VA loan, conventional, or cash offer. As with any government loan, there are valid reasons a property wouldn’t be suitable. But when it comes to borrowers, both FHA and even VA loans can often get a bad rap. Read on to see what’s true and what’s not and what both sellers and borrowers need to know about FHA loans.
Is an FHA loan bad?
Are you wondering if an FHA loan is good or bad? Honestly, these are good loans. Yes, there are good and bad borrowers and good and bad lenders. An FHA loan is an incredible way for people to get into a home with less money down. And just like with VA loans, some of the borrower guidelines are more lenient. But you have to look at the intention of both the FHA and the VA — they want to get people into homes. That’s good, right?
And FHA loans can be good for a seller, too, especially if they are particular about who they want to buy their home. Often sellers are looking to sell to a young professional, couple, or family and picture their home coming to life with new owners. So, in that case, FHA loans can bring life and enthusiasm to a home and even a neighborhood. Most FHA borrowers are so excited and proud to be homeowners and are willing to keep the house up and do any needed repairs.
Perceived Borrower Risk
Some real estate agents and sellers look at FHA borrowers as less qualified. But they shouldn’t. A borrower is either qualified or not qualified. That being said, a lender either does a thorough pre-approval or a 5-minute one that’s not worth the paper the pre-approval is written on. FHA loans get a bad name, but it’s often not because of the borrower. Sometimes realtors have an unjustified dislike for this type of financing, possibly from what another agent said, or maybe they had an FHA loan go bad years ago.
So rather than throwing out borrowers with FHA financing, sellers should consider those who have a solid pre-approval from a reputable lender and are using a realtor with a solid reputation. In an April 2021 article by Forbes, most FHA loans do close. Compared to a conventional loan closing rate of 79.9% — FHA’s closing rate is slightly lower at 76.6%.
FHA Loan Property Requirements
It’s true, some properties aren’t suitable for FHA financing. But that has to do with the property. Not the borrower. Let’s take a look at what won't pass FHA inspection. According to Investopedia, FHA property guidelines are pretty straightforward. The main things they address are safety standards so that the home is in good condition. Inspectors are concerned with roofs, electrical, property access, water heaters, and heating and air in some parts of the country.
What properties qualify for FHA loans? An outdated house can get FHA financing, so can an ugly house. But a property with dry rot, an old roof, and safety issues wouldn’t unless the seller made the repairs before closing. That’s why some sellers don’t want an FHA loan. And if their home has issues they don’t want to repair, they're correct in not accepting an FHA loan. The other thing to remember is that the property appraisal has to come in at or above the sales price. If a home is overpriced and the appraisal comes in low – the lender won’t lend.
Property Won’t Pass FHA Inspection
What won't pass FHA inspection? As a seller and a borrower — here are some of the most common items that come up and must be fixed by the seller before closing.
Passing FHA home inspection shouldn’t be a big deal with most homes, except if they have a lot of deferred maintenance. A good realtor will know if a home will pass FHA’s requirements.
Do sellers usually pay closing costs?
Sellers’ can contribute up to 6% of the sales price towards the borrowers closing costs, but they are not required to. These are referred to as seller concessions. According to USNews.com, the main FHA loan fees that can be paid by the seller are:
1. Mortgage discount points
2. Appraisal costs
3. Attorney fees
4. Title insurance fees
5. Property taxes
If you want the seller to help pay for your closing costs, make sure it’s written in the contract and called out to the seller’s realtor. But keep in mind, if you’re trying to buy in a hot seller’s market — asking for seller concessions could make your offer less appealing.
Does FHA have a longer home closing timeline?
According to an article written April 2021 by Forbes, FHA loans take only three days longer to close compared to conventional home loans. That’s not that much longer, is it? It’s interesting how the truth is never as bad as the rumor when you get the facts.
We think FHA loans are a great product and help thousands of deserving people get into a home. An excellent real estate agent will know how to negotiate in any market when a seller comes to them with FHA financing. Neither sellers, buyers, or realtors should shy away from these outstanding government loans.