Will sellers hate you if you finance with FHA?

by Gina Pogol
October 25th, 2010

Some readers report having problems with sellers refusing to accept offers that include FHA financing in the deal.  You know it’s a buyers’ market, so what gives?! Why isn’t that seller kissing your feet, washing your car and breaking out the Champagne? Here are some of the reasons this may be the case:

Sellers may be aware that their property could not pass muster with an FHA appraiser.

Perhaps the most common reason a house fails this test is that it was both built prior to 1978 and has some amount of peeling paint.  Other safety issues include site hazards, undesirable topography, outdated well or septic systems, abandoned gas wells, industrial areas, and flood zones. Safety problems may also be associated with the building itself, for example steps but no handrail, broken glass, exposed outlets or wires, or outdated utilities. They know the house blows ugly boogers so they want to make it your fault.

Security is another issue — a house can be entered via a back door with no lock, a broken door, or a broken window.  Sometimes new construction or recent improvement have missing doors or wall sections.  Whatever the case, a home must be able to be sealed off and locked in order to be called “secure.”

The construction must be sound. Leaks, foundation cracks, termite tunnels and holes, a worn roof, water in the basement or attic or other obvious physical deficiencies are going to be flagged by the appraiser.

Finally, if the home is a condo unit in a development that is not FHA-approved, the seller won’t take an FHA offer. Like if no one is paying their HOA dues and there is a meth lab on the third floor….

Sellers may confuse FHA with subprime.

Some folks, acting on outdated information from mistaken real estate agents or reeling from too much late-night television, believe that a borrower who needs an FHA loan is not as strong or as likely to be able to close. That is less than factual — FHA borrowers average credit scores are just under 700 these days.  Many buyers want FHA loans to preserve today’s low mortgage rates for future buyers of the home, making it more desirable. Others want to dodge Fannie and Freddie risk-based pricing surcharges. To counteract the fears of these sellers, have a loan approval in hand before making your offer and be willing to forward the lender’s list of closing conditions if it will make them more comfortable.

Understand that sellers’  fears could be legitimate if you have not secured a pre-approval. They don’t know if your credit rating is superior or marginal and likely to get your file peed on by lenders with overlays and stricter guidelines. FHA loans require case numbers that are tied to the property address not the borrower; if your loan is turned down by one lender, that becomes part of HUD’s database and every future lender will know about the declination and possibly be influenced by it. It’s best to get your FHA approval before you shop for your property.

Sellers may be turned off by the (mistaken) idea that he or she will be required to pay buyer closing costs.

In some parts of the country, there is a strong bias against accepting offers with government financing  because of the myths associated with “mandatory seller-paid costs.”  The seller is not required to pay ANY costs for the buyer but is allowed to pay up to 3% with FHA loans.  There are certain “non-allowable” costs for which the buyer is forbidden to pay (they are not big-ticket items in any case).  Either the real estate agents or the lender can pay those costs.  Just request that your lender provide a good faith estimate with none of those charges in it.

This seller bias can be counteracted by having your agent put this language into any offer that you make and highlight it too:

“Seller not responsible for any buyer closing costs, regardless of the selected loan program.  All agency-related “non-allowable” costs to be borne by lender.”

One good thing about the housing crisis is that sellers are being conditioned to look at every deal if they are serious about selling their homes.

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