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.
For many first-time homebuyers or buyers with less-than-perfect credit an FHA loan seems like the ideal way to finally achieve the dream of homeownership. With low down payments and flexible credit requirements FHA loans open the door to buying a home for those who may not qualify for conventional mortgages. So why do so many report that it’s difficult or even impossible for them to buy a house with an FHA loan?
In this article, we’ll examine the most common obstacles buyers face when trying to purchase a home with FHA financing, and provide tips for overcoming those hurdles
FHA Loan Basics
First, a quick overview of FHA loans. FHA stands for Federal Housing Administration – these government-backed mortgages are insured by the FHA but issued by private lenders. The benefits of FHA loans include:
- Low down payments – Only 3.5% is required for qualified buyers
- Lenient credit requirements – Minimum 580 FICO score
- Low monthly mortgage insurance – As low as 0.85% annually
- Gift funds allowed – Family gifts can cover down payment
- Less cash needed at closing – 100% of closing costs can be financed
With perks like these, it’s easy to see the appeal of FHA loans. But buyers are finding the path to purchase isn’t always smooth.
Why Is It Hard to Buy a House with an FHA Loan?
While FHA loans offer more flexible qualifying guidelines, the program does come with some specific requirements that can trip up the buying process. Here are some of the top reasons it’s difficult for some buyers to purchase with FHA financing:
1. Strict FHA Appraisal Guidelines
One of the biggest hurdles with FHA loans is the home appraisal. FHA appraisals are much more rigorous than conventional loan appraisals. Not only must the appraiser confirm the home’s value, but they also must ensure the property meets FHA minimum property standards.
This means the appraiser will check for:
- Structural defects
- Foundation cracks
- Roof issues
- Plumbing, electrical, and HVAC problems
- Infestations
- Environmental hazards like lead paint
If the appraiser finds issues, repairs must be completed before closing. Sellers don’t always want to take on these surprise repair costs and delays. Some even refuse FHA offers for this reason.
2. Fallout from Previous FHA Borrowers
Unfortunately, FHA loans have developed a stigma among some real estate agents and sellers. In the past, some FHA borrowers had last-minute loan denials or couldn’t close on time.
This history causes some sellers to avoid FHA buyers, fearing they are higher risk for mortgage fallout. However, modern data shows FHA loans close at nearly the same rate as conventional mortgages – around 78%.
3. Tight Inventory in Competitive Markets
When housing supply is low, sellers hold the advantage. They may field multiple offers, and can be pickier about accepting certain terms or financing. This puts FHA buyers at a disadvantage if the seller prefers conventional mortgages or cash offers.
However, it is illegal for sellers to outright reject or discourage the use of FHA financing. Their agents cannot advise them to avoid FHA buyers. Sellers can only judge offers based on the terms, not the loan type.
4. Misconceptions About FHA Borrowers
Some sellers avoid FHA buyers because they assume:
- FHA loans are just for buyers with bad credit (not true)
- FHA borrowers are higher risk for default (data proves otherwise)
- FHA borrowers can’t afford maintenance and upkeep (biased assumption)
- FHA appraisals will kill the deal (most homes easily qualify)
These misconceptions mean sellers overlook otherwise excellent offers from qualified FHA borrowers.
Tips for Overcoming FHA Homebuying Hurdles
While securing an FHA loan has some quirks to it, buyers can still effectively navigate the process. Here are tips for smooth sailing:
- Check your credit – Improving your score can open more doors
- Get pre-qualified – Confirm you meet FHA requirements
- Know your budget – Your offer needs to be competitive
- Include a pre-approval letter – Proves you are qualified and ready
- Act quickly on new listings – Be first to make an offer
- Highlight other strengths – Down payment, employment, etc.
- Communicate any weaknesses – Let the seller know your plan to mitigate concerns
- Use an FHA-savvy agent – They can position your offer for success
- Remain persistent and patient – You will find the right home
With the right prep work and persistence, you can absolutely buy a house with FHA financing, even in competitive markets. Don’t let obstacles stop you from pursuing your homeownership dreams.
FHA Loan Success Stories
If you’re still not convinced FHA mortgages can work in your favor, read these true success stories from recent FHA borrowers:
Sarah’s Story
Sarah is a first-time homebuyer with a 620 FICO score. Despite her shorter credit history, she qualified for an FHA loan with 3.5% down. However, sellers in her area were getting multiple all-cash offers, making it tough for her to compete.
By saving for a larger 10% down payment and getting pre-approved for more than she qualified for, Sarah made a compelling offer $5K above list price. She included a personal letter to the sellers about how much she loved the house. They accepted her offer over higher conventional and cash offers!
Michael’s Story
Michael found his dream home but another buyer outbid him with conventional financing. He decided to sweeten his FHA offer with a $5K higher purchase price and flexible closing date. The sellers realized the cash difference was more important than the loan type. They accepted his counteroffer!
Alice’s Story
Alice used an FHA loan to purchase a home even though the seller preferred conventional financing. Her agent set expectations ahead of time regarding the appraisal. When minor roof repairs were required, the sellers agreed to credit Alice $2K at closing to cover costs. She got the home she wanted thanks to good communication.
The bottom line is that with the right strategy, mindset, and real estate professional on your side, FHA financing can absolutely help you successfully purchase a home even in challenging markets. Stay tenacious!
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.
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.
NEW FHA Loan Requirements 2024 – First Time Home Buyer – FHA Loan 2024
FAQ
Is it harder to buy a home with an FHA loan?
It’s not difficult at all. The biggest issue is the appraisal because it’s a government backed loan. They will be tougher on appearance, such as no chipped or peeling paint. It will fail an appraisal because of that issue, so be aware of that. It’s great for first-time home buyers. Definitely don’t be afraid to go FHA.
Why are FHA loans not accepted?
While some sellers may be hesitant to accept an FHA offer, it’s important to understand the facts before making a decision. Some reasons a seller might refuse an FHA loan include misconceptions about longer closing times, stricter property requirements, or the belief that FHA borrowers are riskier.
How much do I need to make to buy a $300K house with an FHA loan?
To buy a $300K house, you’ll generally need to earn a household income around $80,000 per year, assuming 20% down, a 6.5% interest rate, and moderate existing debts.
What is the downside of an FHA loan?