Problems With FHA Buyers
When you go to sell your home, you hope to get lots of offers on your home from well-qualified buyers. But as you go into the sale, you will need to determine if you are interested in receiving all types of offers, including those backed by FHA loans. For those that are not familiar with the term – FHA stands for Federal Housing Administration. FHA is an agency with The US Department of Housing and Urban Development.
If you are selling a home, it is important that you understand the potential issues that can arise when you are dealing with FHA loans, because there can be problems. Knowing the risks beforehand can help you determine if getting an offer from a buyer with FHA financing is really worth your time and energy.
I want to make one thing very clear about FHA loans. For almost thirty years, I have been a Holliston Mass Real Estate agent who has dealt with buyers using FHA financing. For the most part FHA loans are not problematic. There are times, however, where FHA loans can be more of an issue than conventional financing for home sellers.
Below you will see a review of five circumstances where an FHA loan could become a problem for a home seller. By going into a sale with your eyes wide open you will be better equipped to make a smart decision.
More than likely your home sale will go through without a hitch, even if you sell to someone receiving an FHA loan. But there is the possibility that something can go wrong when selling to these buyers, including:
When an appraiser determines that the home is worth less than the price that you and the buyer agreed upon, you can run into problems if you are selling to an FHA buyer who is planning on making the minimum down payment. For an FHA loan, the buyer may have as little as 3.5% as a down payment. The small down payment in itself is not a problem, but the lack of flexibility in the buyer can be.
If the buyer is making a 3.5% down payment and the house is appraised for lower than the agreed upon price, all the sudden the buyer is asking for more than the house is worth from the lender – which is not an option that any lender will go for. The only way to save the deal is for you as the seller to lower the price, something you may not wish to do. A buyer that can only come up with 3.5% down is probably not going to make up the difference necessary to get you the higher price in the sale.
If you are selling to a traditional buyer that can make the 20% down payment, then you will not find yourself in this difficult situation. The buyer can bring extra cash to make up the difference and you can still sell at the higher price that you both agreed upon.
Is this a high risk problem? Maybe yes, maybe no. If you have a low appraisal and it is justified the buyer is probably not going to increase their offer anyway, regardless of how much money they are putting down. Could the appraisal be wrong? That is certainly a possibility. Keep in mind like everything else in life there are good and bad appraisers. If you feel the appraisal is grossly inaccurate then you will need to challenge the appraisal. Just make sure you or your real estate agent are well prepared ahead of time to justify why you believe the appraisal is wrong. It is not easy to get a home value changed without solid evidence of why it should be modified.
Less Than Stellar Credit
An FHA loan is more lenient in its credit requirements than a traditional loan, which means you will be dealing with buyers who may run into issues getting the loan finalized. FHA loans can accommodate buyers with credit scores as low as 580 with a 3.5% down payment, where a traditional loan usually requires at least a 620. While it may not cause a problem, it certainly can.
Borrowers with credit scores of less than 580 will need to put 10% down. It is important to understand that while FHA loans are more lenient on credit scores, individual lenders could have more stringent lending policies. This is called a lender overlay.
Pre-approval for a loan is not final approval, something you may discover if you make a sale to an FHA buyer. He or she may be approved for a certain loan amount, but by the time the lender goes to give the money to the buyer, the buyer’s credit situation may have turned for the worse. If the credit situation of the buyer does not meet the minimum lender requirements, the buyer will not get the loan.
The problem with buyers not getting final approval for their mortgage is not something that only happens with FHA loan applicants. It can happen in any home sale with any buyer buying with a loan. However, it is reasonable to assume that buyers with lower credit scores, like those who tend to seek out FHA loans, may encounter more issues when it comes time to actually qualify for the loan. It is easy to see why an FHA loan could be a problem for a home seller.
When Repairs Are Needed
One of the things all sellers need to be aware of is the fact that your home needs to meet FHA property requirements. FHA loans require that the home be appraised by an appraiser who meets high qualifications. The property condition is one of the biggest reasons why an FHA mortgage could be a problem for a home seller.
These appraisers are looking to make sure that the house is in good condition, safe and habitable. The appraiser will take note of any issues that do not meet the standards of the FHA, and the FHA will expect for all issues to be resolved before any money is given to the buyer.
As the seller, you could be the one expected to pay for these repairs before you can sell the home. And it is not good enough to just give the buyer a closing credit, you actually have to make the repairs and deliver the house in a certain condition before you get paid for the home.
Some of the more common issues that pop up from an FHA appraisal are peeling paint and unsafe access points to areas of a home. There cannot be any peeling paint on the exterior of your home. This will get flagged by the appraiser. It will then become a condition of the loan that must be remedied before a final mortgage commitment is granted. An example of what is considered an unsafe access point is a lack of a hand railing heading to the basement. More than likely you would have to add one in order to pass.
Here is a list of common FHA inspections issues that could be flagged by an appraiser:
- Peeling paint in homes that were constructed prior to 1978.
- Safety issue such as a missing handrail.
- Broken or unattached gutters.
- Exterior doors that do not open and close properly.
- Exposed wiring and uncovered junction boxes.
- Inoperable heating systems.
- Major plumbing issues.
- Inoperable heating systems.
- No active pest issues. This may require an inspection.
- Leaky or defective roofs, roofs with a life expectancy of less than 3 years.
- Rotted window sills, and wood trim.
- Missing appliances that almost always sold with a home such as a stove.
- Kitchen appliances that don’t work.
- Bedrooms without windows for proper egress by a person.
- Foundation or structural defects.
- Actively wet basements.
- Evidence of standing water in a crawl space.
- Empty swimming pools or pools that don’t have a working pump.
- Ripped screens or badly damaged screens.
- No pressure relief valve on water heater.
- A fence in disrepair.
Potential locations issues that cause a problem with FHA mortgages:
1. The property must be a minimum of ten feet from the nearest boundary of a high pressure gas line easement.
2. High tension power lines cannot pass directly over the improvements of a property.
3. The subject property cannot be within 300 feet of an above-ground or sub-surface stationary storage tank with a capacity of 1,000 gallons or more of flammable or explosive material.
4. The subject property must be at least 75 feet from an operating or proposed oil/gas well. Properties with abandoned wells are ineligible.
These are obviously things that all home buyers and real estate agents should understand when using FHA financing to purchase a home!
Condos Must Be Approved By The FHA to Sell
Selling a condominium to an FHA loan recipient can also present difficulties, as both the individual condo and the condo project must be be approved for FHA financing. As you can imagine, it can sometimes be troublesome to meet both of these requirements. You will need to make sure that both your own condo and your entire community will meet the standards of the FHA before you attempt to sell to an FHA loan recipient. Keep in mind, many condos and condo projects do not meet these requirements.
The FHA is looking for financial stability in the condo project, which is demonstrated by a number of different metrics. Some of these requirements include:
- No more than 50% of the property is used for commercial space.
- No more than 15% of unites can be in arrears more than 60 days.
- At least 50% of units must be sold prior to endorsement.
- No more than 50% of units can be rentals or investor owned.
- No more than 50% concentration of FHA loans.
These are only a portion of the requirements for FHA approval, so it is important that you do your research to make sure that you want to sell to FHA buyers. Trying to sell a condo in a project that does not meet minimum requirements is likely to be frustrating if you do not do your homework first.
If you own a condo in a neighborhood where it’s not approved for FHA financing it would be highly advisable to get it approved! Keep in mind that FHA financing makes up a large percentage of loans. This is especially true in condominium neighborhoods where a decent percentage of owners do not have the funds necessary to put down a large down payment. By not having a condo approved for FHA financing, you lose a significant amount of buyers who could be purchasing your unit.
Other Important Mortgage and Financing Articles
- FHA Morgage guidelines sellers should know via Inlanta Mortgage.
- How to get the lowest mortgage interest rate via Maximum Real Estate Exposure
- Why Realtors want pre-approved buyers via Rochester Real Estate Blog.
- Financial mistakes of first time buyers via Maximum Real Estate Exposure.
Use these additional mortgage and financing resources to make smart decisions when selling a home. A well educated seller can put themselves in position to have far fewer headaches.
About the author: The above Real Estate information on how FHA loans can be problematic for home sellers was provided by Bill Gassett, a Nationally recognized leader in his field. Bill can be reached via email at [email protected] or by phone at 508-625-0191. Bill has helped people move in and out of many Metrowest towns for the last 28+ Years.
Thinking of selling your home? I have a passion for Real Estate and love to share my marketing expertise!
I service Real Estate sales in the following Metrowest MA towns: Ashland, Bellingham, Douglas, Framingham, Franklin, Grafton, Holliston, Hopkinton, Hopedale, Medway, Mendon, Milford, Millbury, Millville, Northborough, Northbridge, Shrewsbury, Southborough, Sutton, Wayland, Westborough, Whitinsville, Worcester, Upton and Uxbridge MA.