REThink Real Estate
Q: I’ve been looking to take advantage of the lower prices on the market, and have been approved for an FHA-insured loan with a 3.5 percent down payment, though I plan to put down slightly more than that. I have made several offers on homes where mine was not the only offer. More than once, my offer was rejected — and the listing agent said the reason was that my offer had FHA (Federal Housing Administration) financing. And several other times, I’ve seen properties that I’m interested in and my Realtor says the confidential remarks say no FHA offers will be looked at. I don’t understand why the seller cares whether my loan is an FHA loan or not — they’re going to get the same amount of money no matter what, right?
A: You are correct that, given identical offers, the seller recoups the same net proceeds of sale regardless of whether the buyer’s purchase is financed with an FHA or conventional loan. There are a number of reasons sellers care whether you have an FHA loan, though, and understanding those reasons empowers you to take steps to stack the decks in your favor.
It’s understandable for you to feel stymied and discouraged when your offer is rejected or properties are taken off your house-hunt list strictly because of your loan type. I want to encourage you, though, to rethink this whole thing.
While some listing agents truly do misunderstand and overestimate the property condition guidelines that must be met to qualify for an FHA loan, there are actually a number of reasons a seller might not be willing or able to accept an FHA-funded purchase offer.
When a listing agent specifies “no FHA” in the listing, don’t assume they are buying into an unfair stigma on FHA-funded offers. That’s a shortcut to frustration. Think of it this way — they might be doing you a big favor, allowing you to weed the place out before you waste your time, gas and energy going out to see it. (Or, if the listing agent is being unreasonable by refusing all FHA offers, think of it this way — they just saved you the stress and annoyance of trying to do a transaction with a clueless listing agent!)
Don’t become disheartened. Let me assure you — there is a home for every buyer (even though it might seem like you’ve seen every one of those homes!). Put yourself inside the mind of the seller: If there’s a cash offer you are 99 percent sure will close in 10 days’ time versus an FHA loan-financed offer you are only about 75 percent sure will close at all, it’s a no-brainer which one you would choose. You’ll be much more likely to have eventual success at getting “your” home if you can stay mindful of the seller’s perspective and priorities, and tailor your offer to satisfy their concerns to the extent possible.
In some quarters, FHA loans have acquired a somewhat unfair reputation as being more likely to fall out of escrow than conventional loans. That’s because FHA loans impose a number of condition guidelines on the property being purchased; if the property doesn’t comply, either the seller must repair the property prior to close of escrow or the loan will not be funded and the contract will be canceled.
For example, a home with any of these relatively minor issues — peeling exterior paint on older properties, damaged kitchen flooring, broken windows or a missing stove — might not qualify for an FHA loan. Sellers of homes with any condition problems who want or need to sell the place in as-is condition are hesitant or may even flat-out refuse to look at offers with FHA financing.
Similarly, condos in complexes with a high rate of owner defaults on homeowners association (HOA) dues are not likely to qualify for FHA funding. Nor are homes that were purchased by the seller within 90 days prior to the planned close of escrow; FHA has an anti-flipping provision that prevents a buyer from using an FHA loan to purchase a home that was sold less than 90 days earlier.
I strongly believe that listing agents who screen FHA offers often have Bad Buyer’s Broker PTSD (post-traumatic stress disorder). Unfortunately, there are buyer’s agents out there who write as-is offers and then use the FHA condition guidelines as a pretext for making repair requests they were planning from the get-go.
You said you were planning to put slightly more down than the FHA 3.5 percent minimum. Be aware that with a middle FICO score of 700, you might be able to qualify for conventional (non-FHA) financing with 10 percent down. If your FICO score is lower than that, you might not qualify for conventional loan mortgage insurance, requiring you to put at least 20 percent down on a non-FHA loan.
I’d encourage you to qualify for a conventional loan if possible — it makes for a stronger offer, and you don’t necessarily have to go conventional in the final analysis if the property you end up with qualifies for a lower-down-payment loan.
1. Get approved for the most closable type of financing you can afford and qualify for. Communicate to the seller the total amount of cash you have available to put into the transaction. If you are able to obtain final loan approval with less money down, you may not have to break the bank with your maximum down payment.
2. Apply for loan preapproval from a direct lender, even if you plan to work with a mortgage broker, and submit the direct lender’s approval letter with your offer. Many listing agents see direct lender approvals as more reliable than a broker’s approval letter.