Can A Seller Refuse Your FHA Loan, And Why?

The mortgage you use to finance your new home will have an impact on your home buying journey. Depending on the loan type, you may have to meet unique requirements for inspections, appraisals and your finances. If you're buying a home with an FHA loan, you may run into a seller who’s unwilling to consider your purchase offer.

Can a seller legally refuse an FHA loan? The answer is yes. While there is nothing inherently wrong with FHA home loans, a seller has the right to refuse your offer if they don’t like your financing, and this includes an FHA loan.

You may be wondering why some sellers don’t like FHA loans and how home buyers can step around this hurdle. The good news is that, in some cases, you can override a seller’s objections to an FHA loan.

Read on to learn why sellers refuse FHA loans and – most importantly – strategies to strengthen an FHA offer.

What Is An FHA Loan?

An FHA loan is a government-backed mortgage insured by the Federal Housing Administration (FHA). This loan option is popular among first-time home buyers and buyers with less-than-stellar credit because of its relaxed income and credit score requirements.

It’s also known for offering lower down payment (as low as 3.5%) and closing cost requirements than other loans. Any home financed by an FHA loan must undergo a mandatory FHA appraisal, which can only be conducted by an FHA-certified inspector.

These loan requirements are key to understanding why some sellers refuse an FHA loan offer.

Why Do Some Sellers Not Accept FHA Loans?

Some home sellers see an FHA loan as a “riskier” loan compared to a conventional loan because of the FHA loan’s stricter appraisal requirements. Also, the loan’s lenient financial requirements for borrowers may leave the seller with a negative perception.

Sellers want to sell their homes with as little frustration and cost to them as possible. Anything they believe might pose a risk to a smooth sale may send them running in the other direction.

Let’s dive deeper into some of the reasons why a seller may not accept an FHA mortgage.

Underwriting Process Anxieties And Bias

Because conventional loans have stricter approval standards, sellers may automatically believe a buyer with a conventional loan is in a better financial position to purchase their home. As unjustified as it may be, some sellers may hold a negative perception of an FHA borrower because they didn’t meet the bar of a conventional loan’s stricter requirements.

Sellers may fear the deal will fall through during underwriting when credit and income are verified and assets and credit history are reviewed. They worry that financial problems or other red flags will come up during the process that may cause the buyer to withdraw their offer.

The seller may hesitate even if the buyer has already gone through the initial mortgage approval process, where the lender checks their credit and verifies certain documents to prove their creditworthiness and financial eligibility.

FHA Appraisal Concerns

FHA appraisals differ from conventional loan home appraisals because they require an inspection of the property in addition to an assessment of the value of the home. During an FHA appraisal, the primary focus isn't just the home's value – it's the home’s health and safety.

The home must meet the minimum property standards set by the Department of Housing and Urban Development (HUD). If it doesn’t, the deal could be put on hold until the issues are resolved.

This can be problematic for sellers in a few ways:

• Problems discovered during an FHA approval can slow down the sale of the home.
• Depending on the purchase agreement with the buyer, the seller may need to pay for any required repairs, or it may become the buyer’s responsibility.
• The seller may be concerned that the buyer won’t be able to afford the repairs needed to complete the sale, resulting in the buyer withdrawing their offer or requesting the seller pay for the repairs.
• The assessment could uncover a problem with the home that is significant enough that the seller isn’t permitted to sell the home to anyone, such as structural damage, electrical issues or a wet basement.

If the seller knows there’s an issue with the home they’re not disclosing, they likely won't want it exposed because it could be a deal breaker or add up to a costly repair. It should be a potential red flag for buyers. You should be wary if a seller won’t accept an FHA loan, especially if they can’t or won’t give you a reason. If you're purchasing a home in a state that requires disclosures, carefully go over the Seller’s Disclosure with your agent.

Should Sellers Worry About FHA Loans Closing?

Are sellers’ concerns over FHA loans warranted? It depends.

The number of FHA loans that successfully close in 90 days is comparable to other loan types. About 74% of all FHA loans successfully close within 90 days, according to August 2021 data from the Origination Insight Report by ICE Mortgage Technology. By comparison, about 79% of all conventional loans successfully close within 90 days. That’s only a 5% difference.

What To Do If The Seller Won’t Accept Your FHA Loan

Whatever their reasoning, a seller isn’t legally required to accept a loan they don’t like. While you may be able to work with them to understand where they’re coming from and find an agreement everyone is comfortable with, there are other strategies to try if you run into a seller who refuses FHA loans.

Find Out Why The Seller Won’t Accept An FHA Loan

You can find out a lot by asking, “Why?” The seller may give you a simple answer. If they have reasonable concerns, you may be able to find a solution.

To ease any financial concerns, try sweetening the deal by applying one of these strategies to show the seller you’re financially stable:

• Make an earnest money deposit (or a larger deposit)
• Waive seller concessions
• Consider a no-contingency offer

If the seller won’t provide a legitimate reason or refuses to offer any answer at all, be cautious. They could be trying to cover up a defect in the house.

Take Precautions

If you still want to forge forward with the purchase and the seller is flexible, take the necessary precautions to help ensure you’re making a sound investment. This may include performing research on the home, reading the property disclosures with a critical eye and requesting a thorough home inspection by a highly rated, professional inspector in addition to your FHA appraisal.

As you walk through the home, perform an in-depth inspection of every nook, corner and cranny. Look for defects like exposed wires, cracks in the walls, signs of water in the basement (e.g., stains on the walls, mold and efflorescence) and other problems that would fail a home inspection.

Offer To Pay The Cost Of Repairs

If the seller is concerned about the home not meeting HUD guidelines and doesn’t want to pay for repairs, you can offer to pay for the repairs discovered during the appraisal. With your offer to pay on the table, the seller won’t need to fix anything before handing over the keys, and any repairs become your responsibility before you can close on the home.

Consider A Conventional Loan Instead

If you qualify, opt for a conventional loan instead. Conventional loans allow for lower down payments, but anything under 20% will require you to pay private mortgage insurance (PMI). To qualify for a conventional loan, you need a credit score of 620 or higher and a debt-to-income ratio (DTI) of 50% or less. If your credit score isn’t where you need it to be, you may be able to recruit a co-signer for your mortgage loan.

Withdraw Your Offer

If neither you nor the seller is willing to budge, it may be time to withdraw your offer, walk away from the home and restart your search. While it can be frustrating, it can save you stress, time and money. You may find a home you like even more with another loan type that finally unlocks the door to homeownership.

Talk To A Home Loan Expert

However you choose to proceed with the home buying process, you should work with a lender that will stay by your side every step of the way. Before deciding on your next steps, chat with a Home Loan Expert. You can get your questions answered and see what options you have available. You should also speak to your real estate agent about any complications with the transaction.

The Bottom Line

If an FHA loan is a good fit for you, don’t sacrifice the right home loan for a property that may not be worthwhile. While some sellers aren’t fans of FHA loans, plenty of sellers would be happy to accept an FHA mortgage.

Whether you decide on an FHA loan or a conventional loan, you’ll want to be ready to make an offer on a home without delay. Get prepared and start the mortgage approval process today with Rocket Mortgage^®.