The stigma of FHA financing

Q: I've been looking to take advantage of the lower prices on the market, and have been approved for an FHA-insured loan with a 3.5 percent down payment, though I plan to put down slightly more than that. I have made several offers on homes where mine was not the only offer. More than once, my offer was rejected -- and the listing agent said the reason was that my offer had FHA (Federal Housing Administration) financing. And several other times, I've seen properties that I'm interested in and my Realtor says the confidential remarks say no FHA offers will be looked at.

I don't understand why the seller cares whether my loan is an FHA loan or not -- they're going to get the same amount of money no matter what, right?

A: You are correct that, given identical offers, the seller recoups the same net proceeds of sale regardless of whether the buyer's purchase is financed with an FHA or conventional loan. There are a number of reasons sellers care whether you have an FHA loan, though, and understanding those reasons empowers you to take steps to stack the decks in your favor.

Mindset Management

It's understandable for you to feel stymied and discouraged when your offer is rejected or properties are taken off your house-hunt list strictly because of your loan type. I want to encourage you, though, to rethink this whole thing.

While some listing agents truly do misunderstand and overestimate the property condition guidelines that must be met to qualify for an FHA loan, there are actually a number of reasons a seller might not be willing or able to accept an FHA-funded purchase offer.

When a listing agent specifies "no FHA" in the listing, don't assume they are buying into an unfair stigma on FHA-funded offers. That's a shortcut to frustration. Think of it this way -- they might be doing you a big favor, allowing you to weed the place out before you waste your time, gas and energy going out to see it. (Or, if the listing agent is being unreasonable by refusing all FHA offers, think of it this way -- they just saved you the stress and annoyance of trying to do a transaction with a clueless listing agent!)

Don't become disheartened. Let me assure you -- there is a home for every buyer (even though it might seem like you've seen every one of those homes!). Put yourself inside the mind of the seller: If there's a cash offer you are 99 percent sure will close in 10 days' time versus an FHA loan-financed offer you are only about 75 percent sure will close at all, it's a no-brainer which one you would choose. You'll be much more likely to have eventual success at getting "your" home if you can stay mindful of the seller's perspective and priorities, and tailor your offer to satisfy their concerns to the extent possible.

Need-to-Knows

In some quarters, FHA loans have acquired a somewhat unfair reputation as being more likely to fall out of escrow than conventional loans. That's because FHA loans impose a number of condition guidelines on the property being purchased; if the property doesn't comply, either the seller must repair the property prior to close of escrow or the loan will not be funded and the contract will be canceled. ...CONTINUED

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