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Why Sellers Don't Like Offers with FHA Financing

Why Sellers Don’t Like Offers with FHA Financing

The Problem

Are you hitting road blocks getting your offers accepted by home sellers?  It could be your loan approval.

FHA financing is a very popular home loan choice by many homebuyers that have limited downpayment funds available.

The 2017 market continues to show signs of the affects of government manipulation on interest rates, and has created one of the most competitive seller’s markets we’ve seen in a long time.  But not for the reasons you would think….

Due to huge losses in equity that have finally come back for the most part, and with interest rates holding at all time lows, those that own and have a decent mortgage are not selling.

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Normally, a seller’s market is fueled by high buyer demand.  With interest rates as low as they have been, there are plenty of buyers in the market.  That doesn’t quite explain the competition when trying to get your offer accepted right now.

Today’s market is amplified by a lack of homes for sale.  When you combine motivated buyers with a reduced selection of homes available for sale, you find yourself in a very competitive space.

For reasons I will share in a moment, FHA financing is considered a disadvantage by many sellers and is often overlooked as a serious offer.

If you’re pre-approved for FHA financing now, and whether you’ve been out looking, or just getting started, this information could save you time, money and improve your chances of getting your offer accepted.

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Why is FHA Financing a Problem?

This is a very good question, and the answer is going to shock you.  FHA financing is not trusted because real estate agents do not understand how they work.

Many real estate agents think that a FHA appraisal, which is a little more thorough than a conventional appraisal, is going to jeopardize their clients sales price or identify repairs that need to be done before the sale.

You’ll never hear anyone say this out loud, but I must insist that if the real estate agent representing the seller of the home knew more about today’s FHA borrower, a lot more of these offers would get accepted.

FHA appraisals are not much different than a conventional appraisal due to years of regulation and government oversight after the real estate crash of 2007.   Health and safety issues in the home are going to need to be addressed regardless of what type of financing you’re using.

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The bottom line is that the prejudice being shown toward offers with FHA financing is for the most part unjustified, and

Skin in the Game

Another reason that FHA financing could be a disadvantage is the amount of down payment you are making compared to other offers.

A large downpayment is not necessarily the only thing sellers are looking for, they are looking for larger earnest money deposits, and a qualified buyer.

This really doesn’t have as much to do with FHA financing as it does about skin in the game.

When you can put yourself in the sellers shoes, they have a real estate professional guiding them through the process, looking out for their best interest the entire way.

The “best interest” of the seller is to sell the home quickly, for as much money as possible.  At or above market price.

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Having a large earnest money deposit represents potential for the seller to be compensated for actual expenses should you default on the purchase contract.  This is very persuasive to a seller.

When you understand where the seller is coming from, you will see that you need to have skin in the game, or have a great team working with you to get your offer accepted.

3 Tips for Making More Competitive Offers

When putting more skin in the game (larger good faith deposit) is not an option, there are still things you can do to improve your chances of getting your offer accepted.

Tip #1 – Low Down Conventional: Conventional loans offered by Fannie Mae and Freddie Mac both offer down payment solutions ranging from as low as 1%, to 3%, to 5%.

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HomePossible and HomeReady offer flexible underwriting guidelines that will help many first time buyers avoid the higher costs associated with FHA mortgage insurance.

Have your lender look into one of these programs for you, or contact me if you would like an introduction to someone with experience.

Tip #2 – Mortgage Credit Certificate: Conventional financing is now on the table more than ever.  Even though debt to income ratios are increasing later this month, it might still take some massaging to get your debt to income ratios in line.

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If you’re eligible for a HomePossible or HomeReady loan, there’s a strong likelihood that you also meet the income limits of your local mortgage credit certificate program.

All first time buyers should look into using a mortgage credit certificate program where available.  Using an MCC will not only reduce your qualifying debt to income ratio, it could save you thousands on your federal income tax returns.

Have your research availability of these programs for you, or contact me if you would like an introduction to someone with experience.

Tip #3 – Your Home Buying Team: I’m going to let you in on a little secret that neither your real estate agent or your loan officer will ever tell you.  This secret is that it may be your agent or lender that is preventing you from getting your offer accepted!

Inexperience plays a huge factor in weakening the effectiveness of your purchase offer.  If the agent does not know how to properly present your offer, or if your loan officer is not providing your agent with the information they need, you may be getting punished for not having a good home buying team working for you.

Getting Your Questions Answered

All lenders are not created equal.  Most of the readers that find this site because they’ve been researching solutions to challenges, and have been told 10 different things by 10 different loan officers.

We’ve created this resource to help you sift through the endless opinions and articles that may, or may not directly answer your question correctly.

There are several ways to ask questions, and get expert opinions on this website.

  • Submit a Question:  On the bottom of this page, you’ll see a prompt that allows you to ask questions.  These questions come directly to me and are answered very quickly.
  • Leave a Comment:  Below every article is the option to leave a comment or question.  We see these comments and questions in real-time and the always answered, usually pretty quickly.

In addition to researching your questions and providing you with expert advice, I can also introduce you to a lender friend that I know has experience with your specific situation and can help.

About the Author

Scott Schang

A 20 year veteran of the Mortgage and Real Estate industry, I am passionate about educating and empowering consumers. I have been writing about consumer protection issues, and making sense of complicated real estate and mortgage topics on this website since 2007

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  • Lynne says:

    Through no fault of my own, I had to file Chapt. 7 in 2015. I will have been discharged 2 years this August 21st, 2017 and am having a heck of a time finding financing. Nobody will touch me. FHA will after 2 years and USDA after 3 yrs after date of discharge. I am going through a mortgage broker trying to get pre-approved so I will be ready to go on Aug. 21st, but the pre-approval is evidently going to come with a lot of contingencies and hoops to jump through. I will find out tomorrow. I am already so discouraged and I don’t even know how much I have been pre-approved for. I have owned 3 previous residences in my life and have never been late or foreclosed on. No house or foreclosure in the Chapt. 7 filing either. My credit score is fair and getting better at 684. Guess I just need to hang in here. I don’t see any other options except waiting another year if I can keep renting where I am at. It’s hard…….I find that at 71 years of age, I am being discriminated against in the job market and other places as well. Any words of wisdom for me? I certainly would appreciate any suggestions, etc. Thank you for reading my long narrative here, but I need a little help and education I think.

    • Scott Schang says:

      Hi Lynne,

      Thank you for taking the time to share your experience, I am really sorry that it’s been so difficult for you.

      You are correct about your waiting periods, FHA is 2 years, USDA is 3 years, and Conventional is 4 years. Your loan officer should be able to “credit qualify” you at this point, but you would not get an automated underwriting approval until after August 21st, 2017.

      That should not stop you from identifying the maximum loan amount, and giving you some idea of what to expect. This is based on your debt to income ratios, not your BK waiting period. And your credit score of 684 is more than enough for the best rates with a FHA loan.

      It doesn’t sound like you feel like you’re being treated well, and at the very least, the communication is poor with the loan officer’s you’ve spoken to.

      If you would like, I can introduce you to lender friend of mine that can give you a second opinion. Either leave me an answer here, or send me an email to scott@findmywayhome.com with the State you’re buying in, and I can connect you with someone that I trust.

      Hope this helps?

  • Cheri Herz says:

    How long after you buy a house and sell, do you qualify for first time buyer

    • Scott Schang says:

      Hi Cheri,

      FHA is not a “first time buyer” loan, so you do not have to be a first time buyer to qualify. However, to be eligible for a mortgage credit certificate, and some assistance programs, you cannot have owned a home in the past 3 years.