Reader question: “I have heard that home sellers in hot real estate markets sometimes refuse borrowers with FHA loans, because it’s a hassle or something like that. Is this true? I don’t understand why a seller would do this if the loan is guaranteed by the government. Do sellers sometimes refuse FHA offers in favor of conventional loans?”
Yes, sellers sometimes refuse buyers who use FHA loans. Does it make sense for them to do this? Not really. But does it sometimes happen anyway? Yes. That’s the reality of it.
Why Would a Seller Turn Down an FHA Buyer’s Offer?
It begs the question: Why would a seller turn down a perfectly good offer from a buyer, just because they are using an FHA loan to finance their purchase? A lot of it has to do with old myths and misconceptions that simply refuse to die. In many cases (perhaps in most cases), the bias begins with the seller’s real estate agent. The agent will fill the seller’s head with all kinds of ideas about how an FHA loan will slow the process down, or how they’ll have to pay all kinds of extra fees at closing. But most of it is simply not true.
The processing time for FHA loans is comparable to a conventional (non-government-insured) home loan, because the underwriting checkpoints are mostly the same. In fact, mortgage lenders frequently go above and beyond the minimum underwriting criteria established by HUD for FHA loans. They do this for their own risk-assessment purposes. So it’s not like HUD’s minimum guidelines are going to slow the process down. An efficient underwriter can clear an FHA loan in roughly the same amount of time as a regular loan.
In past years, the mortgage process may have been longer and more complicated for FHA borrowers, when compared to conventional financing. But that really isn’t the case anymore. Some FHA loans go quickly, while others take longer. The same can be said for conventional. But it has more to do with the individual borrower (and the number of underwriting issues they encounter) than the type of loan being used.
Still, some sellers refuse them due to the false “stigma” attached. A smart real estate agent will tell his or her listing clients to take the best offer from the most stable borrower … regardless of the type of loan it is.
Concerns About a Strict Home Inspection Are Overblown
There are also misconceptions about FHA appraisals and inspections. The most common myth is that “HUD inspectors” are overly strict, or that the appraiser will value the home below its true market price. In reality, most homes that are in livable condition with no obvious hazards will clear the FHA appraisal and inspection process.
HUD is mostly concern with health and safety issues, such as lead-based paint that is peeling off the walls, stairwells with no railing, damaged roofs, and that sort of thing. Additionally, any items that are flagged by the appraiser can be repaired and reinspected to keep things moving forward. Here’s a list of property guidelines.
Of course, if you’re trying to buy a severe fixer-upper with a lot of safety and repair issues, then FHA is probably not the best financing method for you. You’ll likely hit a roadblock. But if you’re in the market for a decent home in reasonable condition, you shouldn’t have any problems. Every scenario is different.
The bottom line is that there are plenty of strong, well-qualified borrowers who use the FHA program simply because of the lower down-payment option that is available. Sellers would be silly to refuse offers from such borrowers, simply because of their financing method. It’s a disservice for a real estate listing agent to encourage such a thing.
I’m assuming you are considering a government-insured mortgage loan, based on the nature of your question. I would encourage you to choose the right type of financing for you, and then get out there in the market with your pre-approval letter in hand. There should be plenty of sellers willing to accept a strong offer from an FHA home buyer. If you encounter one who refuses your offer due to some old myth or misconception, it’s their loss. Move on and find another house.