Realtor speaking with client.

Can A Seller Refuse An FHA Loan Offer?

Victoria Araj8-minute read

November 23, 2022

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

While the pandemic housing market has created challenges for many home buyers, it’s been especially difficult for one group: those making offers with government-backed home loans and, in particular, Federal Housing Administration (FHA) loans.

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. 

Can Home Sellers Refuse Offers Backed By An FHA Loan?

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 the mortgage process altogether. In a competitive local market like this, to accept an offer backed by an FHA loan, the seller will likely have to reject multiple offers backed by conventional mortgages – which is something not all sellers will be willing to do.

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.

What Is A Government-Backed Mortgage Loan?

Government-backed mortgages are typically designed to make homeownership possible for first-time or low- to moderate-income home buyers that lenders might be hesitant to extend loan offers to. 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.

Why Don’t Sellers Like FHA Loans?

According to the National Association of REALTORS® (NAR) 2021 Loan Type Survey, 89% of sellers would be likely to accept an offer from a buyer with conventional financing, but only 30% would be willing to accept an offer backed by the FHA or a U.S. Department of Veterans Affairs (VA) home loan. Here are the top four reasons why. 

Stricter Home Inspection Requirements And Appraisal Concerns

When a home seller accepts an offer that will be financed by an FHA loan, they are 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 serve as a wealth accumulation vehicle for the family.

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 will have 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 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.

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.

What The Survey Says

Of the respondents to the NAR Loan Type Survey we mentioned earlier, 62% cited stricter home inspection requirements as a reason to avoid FHA loans.

Lack Of Earnest Money And Down Payment Cash

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 up front. 

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.

What The Survey Says

Of the respondents to the NAR survey we mentioned earlier, 35% cited low down payment, and 21% cited the small amount of earnest funds as an aspect of FHA loans that makes them less attractive to home sellers.

Longer Time To Close

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

Of the NAR survey respondents, 35% cited longer time to close as a reason to avoid FHA loans.

Can I Waive The FHA Home Appraisal Requirements?

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. 

Moreover, 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 make the home livable, safe and hazard-free before closing.

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.

Are There Any Limits On How Sellers Can Choose Among Offers?

Most Americans 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 will 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. 

Your Best Bet: Document Your Reasons For Choosing An Offer

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.

What Should I Do If I Can’t Get My FHA Loan Offer Accepted?

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

You may have heard that conventional loans are hard to get approved for. While it’s true that conventional loans 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 also 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 only 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 home 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 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. 

The Bottom Line: Sellers Can Refuse FHA Loans And May Be Especially Inclined To Do So In A Seller’s Market

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.

Find out if an FHA loan is right for you.

See rates, requirements and benefits.

Victoria Araj

Victoria Araj is a Section Editor for Rocket Mortgage and held roles in mortgage banking, public relations and more in her 15+ years with the company. She holds a bachelor’s degree in journalism with an emphasis in political science from Michigan State University, and a master’s degree in public administration from the University of Michigan.