why do sellers not like fha loans
Reader question : I have heard that home sellers in hot real estate markets sometimes refuse borrowers with FHA loans, because it s a hassle or something like that. Is this true? I don t understand why a seller would do this if the loan is guaranteed by the government. Do sellers sometimes refuse FHA offers in favor of conventional loans? Yes, sellers sometimes refuse buyers who use FHA loans. Does it make sense for them to do this? Not really. But does it sometimes happen anyway? Yes. That s the reality of it. Why Would a Seller Turn Down an FHA Buyer s Offer? It begs the question: Why would a seller turn down a perfectly good offer from a buyer, just because they are using an FHA loan to finance their purchase? A lot of it has to do with old
myths and misconceptions that simply refuse to die. In many cases (perhaps in most cases), the bias begins with the seller s real estate agent. The agent will fill the seller s head with all kinds of ideas about how an FHA loan will slow the process down, or how they ll have to pay all kinds of extra fees at closing. But most of it is simply not true. The processing time for FHA loans is comparable to a conventional (non-government-insured) home loan, because the underwriting checkpoints are mostly the same. In fact, mortgage lenders frequently go above and beyond the minimum underwriting criteria established by HUD for FHA loans. They do this for their own risk-assessment purposes. So it s not like HUD s minimum guidelines are going to slow the process down. An efficient underwriter can clear an FHA loan in roughly the same amount of time as a regular loan. In past years, the mortgage process may have been longer and more complicated for FHA borrowers, when compared to conventional financing. But that really isn t the case anymore.
Some FHA loans go quickly, while others take longer. The same can be said for conventional. But it has more to do with the individual borrower (and the number of underwriting issues they encounter) than the type of loan being used. Still, some sellers refuse them due to the false stigma attached. A smart real estate agent will tell his or her listing clients to take the best offer from the most stable borrower regardless of the type of loan it is. There are also misconceptions about FHA appraisals and inspections. The most common myth is that HUD inspectors are overly strict, or that the appraiser will value the home below its true market price. In reality, most homes that are in livable condition with no obvious hazards will clear the FHA appraisal and inspection process. HUD is mostly concern with health and safety issues, such as lead-based paint that is peeling off the walls, stairwells with no railing, damaged roofs, and that sort of thing. Additionally, any items that are flagged by the appraiser can be repaired and reinspected to keep things moving forward. Of course, if you re trying to buy a severe fixer-upper with a lot of safety and repair issues, then FHA is probably not the best financing method for you. You ll likely hit a roadblock. But if you re in the market for a decent home in reasonable condition, you shouldn t have any problems. Every scenario is different. The bottom line is that there are plenty of strong, well-qualified borrowers who use the FHA program simply because of the lower down-payment option that is available. Sellers would be silly to refuse offers from such borrowers, simply because of their financing method. It s a disservice for a real estate listing agent to encourage such a thing. I m assuming you are considering a government-insured mortgage loan, based on the nature of your question.
I would encourage you to choose the right type of financing for you, and then get out there in the market with your pre-approval letter in hand. There should be plenty of sellers willing to accept a strong offer from an FHA home buyer. If you encounter one who refuses your offer due to some old myth or misconception, it s their loss. Move on and find another house. Federal Housing Administration loans look like aВ godsend right now. The FHA requires a down payment of only 3. 5%, and it just by 0. 5%. (You have to get mortgage insurance when your down payment is less than 20%. ) It'sВ doing all this to attract more home buyersвespecially first-timersвto the market. Before youВ hop on the government loan bandwagon, know this: FHA loansВ arenвt for everyone. There are several things you should consider before applying for one. В FHA. In most areas, theВ limit is $417,000. In certain high-cost areas, the limit is $625,000. Depending on where you live, that might not get you the spacious house you've been dreaming about. To take advantage of the FHAвs low 3. 5% down payment, youвll need a credit score of at least 580. The official minimum for an FHA loan is 500, although borrowers with a score below 580 will need to fork over a 10% down payment. While youвll have an easier time getting an FHA loan with a low credit score, it usually means higher interest rates. But since the FHA backs these loans, youвll get better rates with a poor score than you would with a conventional mortgage. However, itвs often just better to wait and boost your score instead of paying thousands more over the life of the loan. Some lenders wonвt lend to those with scores below a certain threshold, like 620.
Others might change their requirements to adhere to a changing market, which is what Wells Fargo recently didВ when it В from 640 to 600. FHA borrowers are required to pay an upfront (MIP). Currently, the fee is 1. 75%. This fee is usually rolled into the total cost of the mortgage. Additionally, FHA borrowers have to pay annual mortgage insurance. For most loans, this mortgage insurance remains throughout the life of the loanвyou will need to refinance out of an FHA loan to get rid of it. In contrast, you can stop paying mortgage insurance on conventional loans after acquiring 20% equity. In January 2015, the FHA reduced itsВ annual MIP rates to 0. 85%. Remember: The MIP rate you get at the time of your loan is the one youвre stuck with unless you refinance. If you had closed on a mortgage in December 2014 with MIP rates at 1. 35%, your premiums would stay the same in January 2015 despite the reduction. While many lenders are FHA-approved, not all are. This means you may have a smaller selection when it comes to finding an FHA-approved lender in your area. However, you should not have too difficult a timeВ. FHA appraisal guidelines are more rigid than those for conventional loans, and not all houses will get the green light for FHA approval. Usually this means the home needs some kind of repairs. If the seller isnвt willing to make them, then thereвs no FHA loan for that property in your future. If your credit is goodВ and your payment history is solid, you should first look into a nongovernment-backed loan, if only for comparison. Many loans not backed by the FHA have more flexible terms, and lenders have a wider variety of options when they donвt have to adhere to certain. For more smart financial news and advice, head over to.
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