Loan Modification

Will sellers hate you if you finance with FHA?

By Gina Pogol

Some readers report having problems with sellers refusing to accept offers that include FHA financing in the deal.  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  Other safety issues include site hazards, undesirable topography, outdated well or septic systems, abandoned gas wells, industrial areas, and flood zones.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be associated with the building itself, for example steps but no handrail, broken glass, exposed outlets or wires, or outdated utilities.

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.

Sellers may confuse FHA with subprime.

Some folks, acting on outdated information from mistaken real estate agents, believe that a borrower who needs an FHA loan is not as strong or as likely to be able to close, These days that is less than factual — FHA borrowers average credit scores are just under 700 these days. Many folks 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. Their fears could be legitimate if you have not secured an approval; sellers 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 go with the property; if your loan is turned down by one lender, it’s harder to get it approved through another one — whether that lender is financing you or the next person who tries to buy the home.

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 aloowed to pay up to 3% for 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 estimet 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.

Full post as published by FHA Mortgage Guide on October 25, 2010 (boomark / email).