In some cases, using an FHA loan might make it harder to buy a home. But these loans are very common in the real estate market, and most sellers are happy to accept them.
There’s a lot of chatter on the Internet that suggests it can be hard to buy a house with an FHA loan. Some home buyers report having their offers turned down by a seller, simply because they were using an FHA-insured mortgage loan.
Anecdotal reports like these create a lot of questions and concerns for home buyers who are considering an FHA loan. So today, we will explore one of the most frequently asked questions on the subject:
“Is it harder to buy a house with an FHA loan, compared to a conventional loan?”
In a competitive real estate market, it might be trickier to buy a house with an FHA loan compared to conventional financing. But it’s not an insurmountable obstacle.
All Mortgage Products Have Pros and Cons
The truth is that all mortgage products have certain pros and cons associated with them. And this applies to the Federal Housing Administration (FHA) mortgage program as well.
- In some ways, an FHA loan could make it easier for you to buy a home, especially if you don’t have a lot of money saved for a down payment.
- In other ways, an FHA loan might make it harder to buy a home, especially if you’re in a competitive housing market where simultaneous offers are common.
Mortgage financing is not a one-size-fits-all situation. Borrowers have unique circumstances, financing goals, and limitations. So the best strategy is to choose a type of home loan that aligns with your financing goals, and then find a way to make it work.
Below, we will look at how the FHA program can facilitate a home purchase, followed by some scenarios where it might make it harder to buy a home. Consider all of the angles will help you decide if this is the right type of mortgage loan for you.
Fact: Last year, more than 700,000 Americans used an FHA loan to either purchase or refinance a home. Most of those loans were for purchases. This provides ample evidence that a home buyer can succeed when using an FHA-insured mortgage loan.
How an FHA Loan Could Help You
An FHA loan is simply a mortgage loan that gets insured by the government through the Federal Housing Administration, which is part of HUD. This insurance protects the mortgage lender from financial losses related to borrower default (or failure to repay).
This extra layer of protection also allows mortgage lenders to be very flexible when qualifying borrowers for an FHA loan.
FHA loans can be particularly helpful for people who have had credit issues in the past. Borrowers with relatively low credit scores often qualify for FHA loans, even if they’ve been turned down for a conventional (non-government-backed) mortgage in the past.
This program also allows borrowers to make a down payment as low as 3.5% of the purchase price. Standard conventional loans, on the other hand, typically require at least 5% down and sometimes up to 20%, depending on the amount being borrowed.
The bottom line here is that an FHA loan could make it easier to buy a home by (A) offering flexible qualification criteria and (B) reducing the size of the upfront investment.
How an FHA Loan Could Make Things Harder
It’s also possible that an FHA loan might make it harder for you to buy a home, rather than easier. The reason for this mainly comes down to seller perceptions.
Real estate listing agents (who represent sellers) sometimes encourage their clients to put FHA offers at the bottom of the stack, and to prioritize offers that are backed by conventional mortgage financing.
There are two main reasons for this:
- One concern is that FHA loans have strict property requirements that might require the seller to make costly repairs. (More to follow on this.)
- Another concern is that FHA loans are more likely to “fall through” prior to closing, since they are often used as a last resort by borrowers with shaky credit.
These are complex issues, so let’s tackle them one at a time…
1. Concerns About Loan Approval and Closing
Some sellers might worry that a home buyer using an FHA loan is less likely to receive a final approval from the lender. They might worry about the loan falling through, derailing the entire transaction in the process.
This (possible) scenario would represent a major setback for the seller, since they would have to start the process all over again with another buyer.
But is there any truth to this notion? Not really.
A couple of years ago, ICE Mortgage Technology (a company that makes home loan processing software) published a report that showed FHA loans are only slightly less likely to close within 90 days.
They analyzed thousands of loans over a 90-day cycle to determine the percentage of borrowers that reached the final closing stage successfully.
- FHA purchase loans had a closing success rate of 77.2%
- Conventional purchase loans had a closing rate of 78.6%
This and similar reports show that home buyers who use FHA loans have a comparable success rate to those who use conventional (non-government-backed) mortgage loans.
Unfortunately, most sellers don’t have access to these kinds of reports, and their agents might equally uninformed. So there’s often nothing to counteract these stigmas and misconceptions regarding FHA loans.
2. Concerns About Property Requirements and Repairs
FHA-insured mortgage loans also require a home appraisal to determine the current market value of the property. The appraiser will also inspect the property to make sure it meets the minimum requirements imposed by the Federal Housing Administration.
This is an important distinction that sets FHA loans apart from conventional mortgage loans. With conventional financing, the appraisal focuses on determining the market value of the property, and nothing else.
But the FHA appraisal performs double duty. In addition to estimating the market value, the appraiser will evaluate the condition of the home to make sure there are no health and safety issues.
As a result, FHA home appraisals might require additional steps from the seller that wouldn’t be necessary with a conventional loan. If the home appraiser finds an issue that needs to be repaired in order to qualify for FHA financing, it might bring additional out-of-pocket costs for the seller.
Key point: Homes that are in reasonably good condition with no safety hazards or structural usually qualify for FHA financing. In contrast, “fixer-upper” properties that need repair work just to be habitable typically do not qualify for this program.
So we have a combination of concerns among sellers that might make it hard to buy a house with an FHA loan, especially in a hot real estate market. Such concerns aren’t always supported by facts, but they still exist.
How to Make a Stronger Offer on a House
Ultimately, you have to go with the mortgage option that works best for you, based on your financial situation and goals. Just know that your mortgage choices could affect you when making an offer.
So, let’s assume you’ve decided to use an FHA loan to buy a house. Let’s further assume that you’re in a fairly competitive real estate market, where sellers often receive multiple offers from competing buyers.
Here are some steps you can take that might help get your offer accepted:
- Offer a significant earnest money deposit to show commitment.
- Obtain pre-approval for the FHA loan to demonstrate financial readiness.
- Make a strong initial offer based on comparable sales in the area.
- Be flexible with the closing timeline to accommodate the seller’s needs.
- Write a personal letter to the seller expressing interest in the property.
- Avoid asking for concessions to lessen the financial burden on the seller.
- Keep contingencies to a minimum to simplify the transaction for the seller.
- Provide proof of funds for down payment and closing costs.
- Work with an experienced agent who can help you submit a strong offer.
In an active real estate market where multiple offers are common, an FHA loan might make it harder to buy a house. But “harder” does not necessarily mean “impossible.”
Each year, hundreds of thousands of home buyers across the U.S. succeed while using the FHA loan program. And with the right approach, you could be one of them.