Can a Seller Refuse an FHA Loan?
There are home buyers who are shopping for their dream home, but find some sellers are not accepting offers if they are using FHA insured financing to make the purchase.
A seller is legally permitted to refuse offers from buyers who are planning to use an FHA loan to finance the purchase. However, they could be limiting their ability to maximize their sale potential by excluding buyers with FHA financing.
Why do Sellers Refuse FHA Loans?
Sellers will often refuse an FHA loan for multiple reasons which may actually be detrimental to the seller.
- Sellers do Not Want an FHA Inspection
- The Perception that FHA Borrowers are Less Qualified
We will take you through each of these reasons:
Sellers do not Want an FHA Inspection
FHA guidelines require each home to go through a rigorous FHA inspection before each purchase. If there are any problems found during the inspection, those issues must be repaired or mitigated before closing. This often means the seller will have to deal with those issues and usually at their expense. This is the primary reason why sellers may refuse buyers who plan to use an FHA loan to purchase the home.
The Perception that FHA Borrowers are Less Qualified
There is the perception that FHA borrowers are less qualified to purchase the home and there is a higher chance the loan may not go through. This is not the case and there are many home buyers who are using an FHA loan who are more than qualified than those who plan to use a conventional loan.
These ideas or often perpetuated by inexperienced sellers who do not fully understand FHA loans or how to work through their concerns in a way that can actually benefit them.
Is an FHA Loan Bad for Sellers
An FHA loan can be bad for a seller if they are not prepared to sell and market their home effectively. They should familiarize themselves with the FHA inspection requirements before listing the home. This may actually make the home more attractive to a buyer and potentially could result in higher offers on the home.
When is an FHA Loan Good for Sellers
An FHA loan can be good for sellers because it allows for a higher debt to income ratio than conventional loans. This means the buyer can get approved for a larger loan than conventional financing and can possibly pay more for the home if negotiations and bids drive the price up.
An FHA loan program that can be extremely beneficial for sellers is the FHA 203 rehab loan. The program allows the buyer to also include rehab funds into their mortgage. This also means any issues found during the inspection process can be dealt with by the buyer after closing rather than the seller before closing.
How Can a Buyer Convince a Seller to Accept an FHA Loan
If you plan to purchase a home using an FHA loan, then you may need to convince the seller to accept your bid anyway.
Bill Gassett, a 35 year real estate veteran and owner of Maximum Real Estate Exposure explains the following. “The way a buyer could get a seller to accept their offer would be to agree to take care of any issues required by the FHA. For example, if the FHA appraiser flags peeling paint on the deck, the buyer would need to agree up front that they will be the ones fixing it.”
This is definitely one way to get around the issue, but the repairs may need to be done prior to closing.
Mark Buskuhl of Ninebird Properties adds, “Assuming the property will qualify for an FHA loan, buyers should pay extra attention to the details of their offer and focus on earnest money deposits, limited contingencies, and a strong purchase price. These extra details may be enough to convince and unwilling seller to reconsider.”
Do Sellers Prefer FHA or Conventional Loans
In general, sellers prefer conventional loans over FHA loans but it is likely due to their lack of understanding of how each type of loan truly impacts a them.
A buyer who plans to finance the home with a conventional loan can ask the seller to make more repairs than may be required for an FHA loan.
Conventional buyers may also be less qualified than an FHA buyer depending upon how well they were prepared by their loan officer.
Read [FHA vs Conventional Loans]
A seller can refuse offers from buyers who plan to use FHA financing, but that thought process may be misguided and could actually be detrimental to the seller in the end.
Home sellers should entertain offers from all buyers regardless of what type of loan they plan to use, but add some contingencies that are beneficial to them.