Home > Mortgages > Could an FHA Loan Keep You From Your Dream Home?

Comments 0 Comments
Advertiser Disclosure


FHA loans, with their low down payments and relaxed credit requirements, are supposed to make it easier to buy a home. But home sellers haven’t always welcomed FHA offers with open arms.

Stories about nit-picking home inspections, marginally qualified buyers, delays in closing and demands for substantial seller concessions sometimes make some sellers reluctant to accept FHA offers. But lending and real estate professionals say those concerns are largely overblown or outdated.

Part of the problem, it seems, is the type of buyer that tends to use an FHA loan – those with less cash on hand for a down payment and/or lower credit scores. (You can check your credit scores for free on Credit.com.)

Is the Borrower Qualified?

“I think what happens is that sellers look at FHA buyers and think, in my opinion, that they’re less qualified,” said Stanley Brooks, a Wellesley, Mass. a real estate attorney. “I think from the seller’s perspective, they’re trying to make sure they’ve got the best qualified buyer.”

Brooks said there may also be a perception that FHA borrowers are stretching themselves financially to make the purchase, and don’t have much of a cash reserve. That could be a problem if the appraisal comes in low and the borrower has to come up with additional cash to close the loan.

The fact a borrower is using an FHA loan doesn’t necessarily mean a borrower is marginally qualified, Brooks said. He notes they may simply be holding cash in reserve for other purposes, such as home improvements after the sale is completed.

“Maybe it needs a new roof or they want to remodel the kitchen,” he said. “That could be another reason somebody would want an FHA loan.”

In fact, in most areas borrowers can’t even make an offer to a listing agent unless they’ve already been pre-approved for a mortgage, according to Mary Adams, branch manager of Movement Mortgage in Ann Arbor, Mich. That means a lender has already done an initial check into the buyer’s finances.

“That assures the seller they don’t have to worry about the buyer’s credit,” she said.

Even so, a seller is going to assume that an offer from a buyer putting 20% down is going to be more solid than an offer with 3% down, Adams said.

“All things being equal, the seller is obviously going to take the one with 20% down,” she said.

An Old Reputation About Home Inspections

Another issue may be that the FHA is still dogged by its old reputation for overly demanding standards on home inspections, requiring that minor repairs be completed at the seller’s expense before the sale could be approved. But those standards have eased considerably.

“It used to be a nightmare,” said Adams, a 40-year veteran of the mortgage business. “You’d get an appraisal back and you would have pages and pages of repairs.”

Adams said that back in the 1970s FHA inspectors would go so far as to require that rooms be repainted before a sale could be completed, and just because the paint was faded and not even peeling. But all that changed after the FHA significantly relaxed its guidelines some years back.

“They realized their job was to help the public buy homes,” she said.

Adams described the current FHA home inspection guidelines as only “marginally more strict” than conventional loans, with three main things that must be corrected prior to a sale, Adams said:

  1. There must be ground-fault interrupters installed wherever there is an electric outlet near a water source at counter level, such as by a bathroom or kitchen sink.
  2. Any tripping hazards, such as from uneven concrete or paving stones, must be corrected.
  3. There may be no peeling paint, particularly in pre-1978 houses where there might be a lead exposure hazard.

Even then, those requirements aren’t necessarily limited to purchases with FHA loans.

“I have seen appraisers cite the same things all the time for conventional loans,” Adams said.

Seller Concessions

Another potential turnoff for home sellers with FHA loans is the seller concessions. FHA mortgages allow sellers to contribute up to 6% of the sales price toward the buyer’s closing costs, compared to 3% on conventional loans.

Sellers don’t like the larger concessions, because they mean less money for them at the close of the deal. However, just because FHA rules allow a seller to contribute that much doesn’t mean they have to do it.

Seller concessions are just one of the things negotiated between a buyer and seller in a real estate deal. If the home is priced attractively enough or if it’s a hot real estate market, a home seller might not have to make any concessions at all to close the deal. In fact, in some cases it could even be the FHA buyer who has to make concessions to the seller.

“You’re going to have to do something to sweeten the deal if you’re an FHA buyer in a hot market right now,” said John Windle, a Realtor in McKinney, Texas.

Windle, team leader of the Windle Group at Coldwell-Banker Apex Group, said that he tells FHA clients that the days of seller concessions in the hot markets of the Dallas-Ft. Worth area are over. In fact, he’ll often suggest that FHA buyers offer to do something like pay for their own title insurance, which represents about a 1% concession to the seller.

In a slower, less populated market where homes might take 30-60 days to sell, rather than getting multiple offers the day they go on the market, a seller would be under more pressure to grant greater concessions to an FHA buyer.

But on identical offers, Windle said, there’s really no cost difference to the seller between an FHA loan and a conventional loan for the same amount – as long as the home is priced accurately, it’s apples to apples.

Some Problems May Still Arise

That’s not to say it’s always smooth sailing for home sellers when dealing with FHA buyers. Deals for lower-end homes may have more difficulty passing FHA muster. John Markuson, a Chicago-area real estate investor, reported extensive problems with getting FHA approvals when he was selling a number of his former rental homes in the sub-$120,000 range last year.

“They didn’t even seem to want the loans,” he said of the various lenders involved. He said he faced difficulty with both the inspections and getting approvals for seemingly well-qualified buyers. He said he’s not sure if he simply faced more obstacles due to the price range involved.

Another potential problem area, according Adams, may arise with condominium purchases. In some cases, she said, condo developments may have owner-managers who have a bias against FHA loans. For example, the managers may not want to reapply for the development to be FHA-approved, a status that needs to be renewed every two years. If that happens, units in the development aren’t eligible for FHA funding. That’s in addition to the FHA’s occupancy rate requirements and limitation that no more than half of the units in a condo development be owned by the same person.

While some sellers may still be resistant to the notion of FHA loans, excluding FHA purchasers can be costly. That’s because FHA loans account for roughly 30% of the home purchases under $300,000, many of them to first-time buyers.

“By arbitrarily saying no FHA buyers, you’re cutting down the marketability of your property and excluding potential buyers,” said Brooks.

More on Mortgages & Homebuying:

Image: Photos.com

Comments on articles and responses to those comments are not provided or commissioned by a bank advertiser. Responses have not been reviewed, approved or otherwise endorsed by a bank advertiser. It is not a bank advertiser's responsibility to ensure all posts and/or questions are answered.

Please note that our comments are moderated, so it may take a little time before you see them on the page. Thanks for your patience.

Credit.com receives compensation for the financial products and services advertised on this site if our users apply for and sign up for any of them.

Hello, Reader!

Thanks for checking out Credit.com. We hope you find the site and the journalism we produce useful. We wanted to take some time to tell you a bit about ourselves.

Our People

The Credit.com editorial team is staffed by a team of editors and reporters, each with many years of financial reporting experience. We’ve worked for places like the New York Times, American Banker, Frontline, TheStreet.com, Business Insider, ABC News, NBC News, CNBC and many others. We also employ a few freelancers and more than 50 contributors (these are typically subject matter experts from the worlds of finance, academia, politics, business and elsewhere).

Our Reporting

We take great pains to ensure that the articles, video and graphics you see on Credit.com are thoroughly reported and fact-checked. Each story is read by two separate editors, and we adhere to the highest editorial standards. We’re not perfect, however, and if you see something that you think is wrong, please email us at editorial team [at] credit [dot] com,

The Credit.com editorial team is committed to providing our readers and viewers with sound, well-reported and understandable information designed to inform and empower. We won’t tell you what to do. We will, however, do our best to explain the consequences of various actions, thereby arming you with the information you need to make decisions that are in your best interests. We also write about things relating to money and finance we think are interesting and want to share.

In addition to appearing on Credit.com, our articles are syndicated to dozens of other news sites. We have more than 100 partners, including MSN, ABC News, CBS News, Yahoo, Marketwatch, Scripps, Money Magazine and many others. This network operates similarly to the Associated Press or Reuters, except we focus almost exclusively on issues relating to personal finance. These are not advertorial or paid placements, rather we provide these articles to our partners in most cases for free. These relationships create more awareness of Credit.com in general and they result in more traffic to us as well.

Our Business Model

Credit.com’s journalism is largely supported by an e-commerce business model. Rather than rely on revenue from display ad impressions, Credit.com maintains a financial marketplace separate from its editorial pages. When someone navigates to those pages, and applies for a credit card, for example, Credit.com will get paid what is essentially a finder’s fee if that person ends up getting the card. That doesn’t mean, however, that our editorial decisions are informed by the products available in our marketplace. The editorial team chooses what to write about and how to write about it independently of the decisions and priorities of the business side of the company. In fact, we maintain a strict and important firewall between the editorial and business departments. Our mission as journalists is to serve the reader, not the advertiser. In that sense, we are no different from any other news organization that is supported by ad revenue.

Visitors to Credit.com are also able to register for a free Credit.com account, which gives them access to a tool called The Credit Report Card. This tool provides users with two free credit scores and a breakdown of the information in their Experian credit report, updated twice monthly. Again, this tool is entirely free, and we mention that frequently in our articles, because we think that it’s a good thing for users to have access to data like this. Separate from its educational value, there is also a business angle to the Credit Report Card. Registered users can be matched with products and services for which they are most likely to qualify. In other words, if you register and you find that your credit is less than stellar, Credit.com won’t recommend a high-end platinum credit card that requires an excellent credit score You’d likely get rejected, and that’s no good for you or Credit.com. You’d be no closer to getting a product you need, there’d be a wasted inquiry on your credit report, and Credit.com wouldn’t get paid. These are essentially what are commonly referred to as "targeted ads" in the world of the Internet. Despite all of this, however, even if you never apply for any product, the Credit Report Card will remain free, and none of this will impact how the editorial team reports on credit and credit scores.

Your Stories

Lastly, much of what we do is informed by our own experiences as well as the experiences of our readers. We want to tell your stories if you’re interested in sharing them. Please email us at story ideas [at] credit [dot] com with ideas or visit us on Facebook or Twitter.

Thanks for stopping by.

- The Credit.com Editorial Team