Can A Seller Refuse An FHA Loan Offer?

If you’re trying to buy a home in a highly competitive housing market – where home sellers can get multiple contingency-free offers above the asking price within a day – you know how hard it can be to get an offer accepted.

Those making offers with government-backed home loans and, in particular, Federal Housing Administration (FHA) loans tend to experience refusals in the real estate market.

Let’s take a look at why some sellers could avoid FHA loans and what home buyers can do if they’re having trouble getting their offer accepted.

Unfortunately, yes, they can. In a competitive seller’s market, a home’s seller might have their pick of many offers. They may even be able to choose an all-cash offer and avoid dealing with the mortgage process altogether. In a competitive local market like this, the seller will likely reject multiple offers backed by conventional mortgages.

Sellers are generally free to choose whichever offer they like best, and they don’t legally have to accept or even consider any offers, FHA or otherwise.

Government-backed mortgages are typically designed to make homeownership possible for first-time or low- to moderate-income home buyers that may have a difficult time getting loan offers from other lenders. By insuring these loans – agreeing to pay the lender if the homeowner defaults on the mortgage – the government reduces some of the risk to lenders.

Examples of government-backed mortgage loans include: FHA loans, Department of Veterans Affairs (VA) loans, U.S. Department of Agriculture (USDA) loans, government business loans, government disaster-relief loans and government agriculture loans.

As a buyer, you might be curious as to why some sellers don’t accept FHA loan offers. Here are the top three reasons.

1. Stricter Home Inspection Requirements And Appraisal Concerns

When a home seller accepts an offer that’s financed by an FHA loan, they’re agreeing to meet a set of standards that conventional lenders aren’t always concerned about. The FHA loan process seeks to ensure that the house a buyer wants to purchase will make for a livable, safe and healthy home that will help the borrower grow their wealth and not lose their house.

Mortgages offered through the FHA follow appraisal standards set forth by the Department of Housing and Urban Development (HUD)’s appraisal guidelines, which are much more rigorous than the appraisal standards for a conventional mortgage. 

To complete the mortgage process, the home has to go through a more extensive appraisal process to show that the home meets special FHA requirements. Although a home inspection isn’t required with FHA mortgages, the property must still be appraised by an FHA approved appraiser to meet the HUD’s minimum property standards for safety, security and soundness.

FHA Vs. Conventional Loan Standards

FHA appraisal standards differ from those ordered by conventional lenders.

In a standard appraisal, conventional lenders are looking to determine whether the value of the house is enough to act as security for the loan. In other words, if you default on the loan, your lender wants to be sure they’ll be able to sell the house to recoup their loss.

The government, however, wants to also help guarantee that home buyers only buy houses that are safe, livable and healthy. To make that happen, the three government agencies that insure home loans adhere to rules and requirements that other loan programs don’t.

FHA Appraisal Red Flags

Anything that affects the health and safety of the home will be a problem that the seller will likely need to resolve before the loan can be approved. That includes any non-working system in the home, particularly electrical, HVAC, plumbing, water supply and wastewater removal issues.

For example, if the FHA appraiser says your septic tank is approaching the end of its useful life, it will probably have to be replaced if you want the mortgage to be approved – even if it has been faithfully maintained and has had no obvious problems.

This can be a deterrent for sellers, leading them to reject an FHA loan offer.

Required Repairs

A seller may be required to make repairs to their home based on the findings of the FHA appraisal process if they want to move forward with the sale.

Required repairs are generally limited to those necessary to ensure:

• The health and safety of the occupants
• The security of the property
• The structural integrity, or soundness, of the home

FHA Livability Standards Can Cost Sellers

Sellers are required, to the extent mandated by law, to complete Seller’s Disclosure forms when selling their home. They’re under no obligation to look for problems, only to disclose known issues.

If the FHA appraisal process reveals new problems and the home loan is denied, sellers will likely have to relist their home and disclose the newly discovered problem to future prospective buyers. Something most sellers in a hot market won’t be willing to deal with.

2. Lack Of Earnest Money And Down Payment

Home sellers can sometimes be dazzled by offers accompanied by large earnest money deposit checks. Unfortunately, the typical home buyer using an FHA loan is unlikely to have excess cash upfront.

Cash Is King

If a home buyer has less cash to put toward a down payment, they may be less likely to be approved for a mortgage, depending on the state of their finances. If a buyer does have a good amount of cash saved up, however, a large down payment can go a long way in easing a lender’s concerns about past credit problems.

Your earnest money becomes part of your down payment, so it really doesn’t make a difference to sellers in terms of the proceeds of the sale. Sellers know, however, that the more cash you’re able to offer in the beginning, the more likely it is that you’ll go on to be approved. For sellers looking for a silky-smooth transaction, cash can be a powerful motivator.

3. Longer Time To Close

Finally, because of the added requirements and government oversight, FHA loan approvals often take longer than on conventional mortgages. That means sellers who accept FHA loans will often have to wait longer to get to the closing table.

In a hot market, you’ll be competing in bidding wars against buyers willing to waive contingencies in order to make their offer more attractive to home sellers. Unfortunately, home buyers can’t waive any FHA appraisal requirements.

With a conventional loan, a home buyer can buy a house as is, as long as the appraisal value is high enough to satisfy the lender. The home buyers can then make the repairs themselves, if they want to. That can’t happen with an FHA loan, which requires the home seller to meet FHA guidelines for the appraisal.

That’s another reason that home buyers seeking to use an FHA loan are at a potential disadvantage over all-cash or conventional loan home buyers.

Most sellers are free to sell their home to whomever they like, with two important caveats.

Sales To Family Members: Tax Rules

If you want to sell your home to a family member, you’ll need to be careful to avoid tax or other legal ramifications. The IRS will look closely at these sales to make sure gift tax rules are followed and that the transfer wasn’t made to avoid other taxes.

Fair Housing Laws

Home sellers must comply with equal opportunity housing laws at the federal, state and local level that prohibit discrimination against a home buyer on the basis of race, color, religion, sex (including gender identity and sexual orientation), familial status, national origin and disability.

Home sellers should base their decisions solely on financial and legal considerations, like contingencies, that are contained in the offer. A home seller should always be able to offer an easily explainable reason for choosing a less financially advantageous offer that is not rooted in discrimination of any kind.

If you’re an FHA borrower, you can take certain steps if you’ve been having trouble buying a home with your FHA mortgage approval.

Apply For A Conventional Loan If Possible

While conventional loans do have stricter credit requirements, you don’t need to have perfect credit: A credit score of 620 is the minimum requirement with many lenders.

You may have heard that conventional loans require a 20% down payment. It’s a common misconception that confuses the threshold needed to avoid private mortgage insurance (PMI)  with the required amount of cash you need to buy a house. At Rocket Mortgage®, you typically need to make a down payment of 3%.

You’ll need to pay upfront and annual mortgage insurance premiums with an FHA loan. In fact, overall, it’s possible you’ll pay less with PMI than you’ll pay with MIP on FHA loans because PMI is removed when the homeowner reaches a threshold of 20% home equity. MIP payments continue for at least 11 years or potentially for the life of the loan depending on your initial down payment.

Widen Your House Search

If you’re living in a high-cost housing market and have been hoping to buy a house there, you may need to expand your search away from the city center and take advantage of lower prices elsewhere.

Of course, the appeal of this idea depends on your willingness to live outside the city and the expense of commuting each day. If you have the freedom of working from home, this might be your ticket to a more affordable home – with less competition from other buyers.

Look Into First-Time Home Buyer Programs

Several national first-time home buyer assistance programs are available to help low- and middle-income first-time buyers. Additionally, your state or local government might have programs that can help, too. HUD maintains a database of these programs.

Save For A Larger Down Payment

With a larger down payment, you may qualify more easily for a conventional loan if you’ve had credit problems. The more money you put into the house upfront, the less risk the lender assumes. Plus, putting more cash forward shows lenders you’ve saved toward a goal – an important sign of financial maturity – and may reassure lenders that you’re serious about repaying your mortgage.

Wait For A More Favorable Market

If you’re in a stable housing situation and can stay put for a while, you can try waiting out an unfavorable market in your area. You may not encounter a buyer’s market any time soon, but a softening of the market could make sellers a little more willing to work with home buyers using an FHA mortgage.

Home buyers attempting to get FHA-backed loan offers accepted will probably have a harder time than conventional borrowers until the housing market swings into widespread buyer’s market territory. Until then, striving for conventional loan approval may be a more straightforward option, if it’s financially possible for you.

Ready to take the next step toward homeownership? Apply online now and find out which loans you qualify for.