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Can sellers refuse your FHA loan?

Reasons Sellers Don’t Accept – or Still Like – FHA Loans

Once they’ve accepted an offer on their home, most sellers want to move from purchase to closing as quickly and with as few hurdles as possible. Unfortunately, sellers often perceive the FHA loan approval process as risky due to FHA’s relatively lenient financial requirements and stricter appraisal and ownership standards.

While some of these concerns stem from a misconception, minimum ownership standards (MPS) for FHA mortgages can potentially cost sellers a lot of money in repairs and selling prices. Let’s explore in more detail the various reasons why some sellers don’t like – or, at least, are nervous about – FHA loans.

FHA underwriting worries some sellers

One of the reasons a seller may decline your FHA-backed offer is that they think the sale of the home is more likely to fail because of the FHA’s lending program’s more lenient underwriting requirements. Since FHA loans help low-to-moderate income borrowers with less than stellar credit become homeowners, sellers may think that FHA buyers are less likely to be approved for a loan than conventional borrowers.

What sellers may forget to consider is that as long as you have pre-approval from a credible mortgage lender, that lender has already checked your credit score, verified your income, calculated your debt-to-income ratio ( DTI) and approved you for a certain loan amount.

Although initial approval does not guarantee final loan approval, FHA borrowers historically have a closing rate comparable to the closing rate of conventional borrowers. For example, according to a Ellie Mae Origin Insight Report May 201976% of all FHA purchase loans closed within 90 days, compared to 77% of all conventional purchase loans.

In March 2021, another Ellie Mae’s Analysis Report on Origination revealed that FHA purchase loans had a closing rate of 77.2%, compared to 78.6% for conventional purchase loans in a 90-day cycle.

FHA ratings are for sellers

Another concern sellers have with FHA mortgages is the FHA appraisal. Let’s see how FHA appraisals compare to conventional appraisals:

  • Conventional loans: Since the home serves as collateral for a conventional mortgage, the primary purpose of an appraisal is to determine that the fair market value of the home is not less than the purchase price. This way, if a borrower defaults on their mortgage, the lender can sell the property, recoup their losses, and not lose money.
  • FHA Loans: In addition to determining the appraised value of the home relative to its market value, the FHA wants to make sure the property is safe, secure, and structurally sound. As such, an FHA appraiser inspects the home to ensure it meets a strict set of standards established by the US Department of Housing and Urban Development (HUD). We will discuss these standards in more detail in the next section. There are also health and safety standards for properties secured by conventional mortgages, but they are not as stringent.

Stricter ownership requirements can cost sellers money

During an FHA appraisal, the appraiser will check to make sure the property meets the FHA’s minimum property standards. The assessor will inspect home systems, such as the HVAC, water heater, and electrical systems, to ensure they are functional. They will also look for termite damage, foundation cracks, lead paint, and other potential safety issues.

So what happens if a problem is detected?

  • The sale of the house could be delayed. If a minimum property standard is not met, the issue will need to be resolved before the property is approved and the sale can be completed.
  • The repair could be expensive. For example, if a roof leak is detected, repairs must be made before the FHA loan can proceed with closing. However, according to the FHA’s MPS, another layer to the roof cannot be added if the roof already has three layers. Instead, the FHA would require a new roof to be installed before it could close.
  • The sale of the house could fail. If the seller doesn’t have the money for a new roof, you can offer to pay a higher purchase price so that they are reimbursed after the sale of their house. But that’s only if the higher purchase price doesn’t exceed the loan amount you’ve been approved for. Otherwise, the home loan could be refused and the sale would fail completely. Alternatively, they could lower the asking price so you have money for the repair. However, you may have to wait to move in until it’s finished.

In most states, sellers are required to complete a Seller Disclosure Form that communicates any known issues with the property. A seller is not required to look for problems with their home, but if an FHA appraisal found a problem that caused a buyer to walk away from selling the home, the seller would have to disclose the newly discovered problem – and probably reduce his demands. price – when they put their house up for sale.

It’s important to remember here that, despite tougher real estate standards, almost as many FHA loans make it to closing as conventional loans. But even the remote possibility of losing thousands — even tens of thousands — of dollars due to FHA’s minimum property standards is enough to convince many sellers to avoid FHA loans.

Sellers Think FHA Loans Take Longer to Close

Some sellers may believe that the additional requirements and stricter appraisal standards cause FHA loans to take longer to close than conventional loans.

On paper, the difference is not great. According to the previously mentioned Ellie May Origination Insight report, it took an average of 49 days for conventional purchase loans to close in May 2021, compared to 54 days for FHA loans, a difference of only about one work week.

However, if a seller has already purchased their next home – or if those extra 5 days delay the closing date until the following month – the extra delay to closing could cost sellers hundreds or even thousands of dollars in extra mortgage payments. and other fees.