Why Won't a Seller Accept an FHA Loan?

Some sellers refuse to entertain offers using FHA financing because they don't want to make repairs that FHA may require.
Some sellers refuse to entertain offers using FHA financing because they don't want to make repairs that FHA may require. (Image: house for sale image by itsallgood from Fotolia.com)

In a slow real estate market, a seller needs as large of a pool of available buyers as he can get to increase the odds of a quick sale at fair price. Sellers generally do not know enough about financing types to refuse a particular type, since their primary concern is the sale of their home and their net profit. Due to outdated and erroneous information, many listing agents refuse to accept or discourage offers with FHA financing. While there are some valid reasons for some sellers to refuse these offers, these are the exception, not the norm.


FHA loans are loans insured by the Federal Housing Administration (FHA) against loss by the lender in exchange for the lender following FHA loan guidelines. These guidelines are more forgiving than conventional loan guidelines on issues such as minimum credit scores and the amount of downpayment. FHA loans enable those with past financial difficulty or without a large downpayment to buy a home. FHA maximum loan amounts are higher now than in the past, opening up a new range of available home prices.


Prior to January 1, 2006, FHA guidelines required the seller to repair defects found by the appraiser before granting loan approval. Some of these issues were more cosmetic in nature, such as worn flooring or broken windows. The FHA still requires seller repairs, but only for issues that directly affect the health and safety of the occupants or the structural soundness of the property. These items include leaking roofs, foundation or structural wall damage, standing water around foundations, defective major systems and active termite infestation. The home and property must be free of toxins and peeling lead paint -- an issue in homes older than 1978. If a seller does not want to make major repairs, he may refuse FHA financing. His agent could also be uninformed about FHA appraisal guideline changes.


Some sellers and lenders have owned the home for fewer than 90 days and do not want to wait for the end of the 90-day waiting period the FHA put in place to discourage undue “flipping” of properties. Beginning in 2006, the FHA began temporarily loosening some of these guidelines to make it easier for lenders and owners of foreclosed properties and nonprofits to sell homes to FHA buyers. Investors who buy defective homes and fix them up to sell as starter homes are also exempt from this 90-day rule under certain circumstances.


Some agents and sellers are under the misconception that FHA loans take longer to process. While some manual files take longer, the majority of files take 30 days or less to process. FHA appraisals can be completed in a matter of days, depending on the lender and the appraiser.


Some sellers and agents are under the impression that FHA loans require additional costs to the seller compared to conventional loans. This is not the case. While there is much greater leeway in what closing costs the seller can pay for an FHA loan, there are no mandatory seller costs or additional costs to the seller.

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