The Risks of Selling Homes to FHA Buyers

If you are selling your home and looking at offers, you have so many things to think about. Are you getting the price you want?  Can you be moved out in time for closing?  What kind of repairs will you have to make?  Will the buyer be looking for a credit?  How much are your closing costs?  Is the buyer going to get a loan?  Is the buyer putting down enough money?  Is the buyer getting an FHA loan?  What does that mean for me?  And at the end of the day, is this going to close?

That’s what it all comes down to: Is it going to close? As a Seller, are you going with the right offer – the one that’s most likely to close and still give you the price you want?  You already know you need to make sure the buyer either has the cash or qualifies for a loan.  But many buyers nowadays go with an FHA loan, especially if they don’t have enough cash to put down or if they don’t have the best credit.  Unfortunately, that FHA offer may be your only offer, and therefore you’re going to take it.  Or it might just be the best offer for some other reason, such as the price or some other accommodation the buyer is willing to make for you.  But if you accept an FHA offer, you should know your risks:

  1. First of all, if you’re selling a condominium, your association must be on the FHA’s list of approved condominium associations. If it’s not, your buyer will most likely not qualify. Sometimes an association is able to get a special approval, but there are a lot of hoops to jump through. For example, if you have a lot of units leased in your association, you are less likely to qualify for FHA approval. If you’re considering selling to an FHA buyer, be proactive and figures out if your association is FHA-approved before you take your home off the market; you could be losing valuable marketing time otherwise.
  2.  There are usually two reasons that buyers choose FHA loans – they don’t have enough money to make a larger down payment, and/or they don’t have credit that’s good enough to get them a conventional loan. That means you’re dealing with a more risky pool of buyers to begin with, without dealing with issues that may be specific to your home (as explained it item 1 above and items 3 and 4 below). Plus if your buyer is short on cash, they are more likely to request a closing cost credit.
  3. Anytime you sell your home and the buyer is getting financing, even conventional financing, his lender will order an appraisal. If the appraisal comes back low and (a) the buyer doesn’t have money to make up the difference between the appraised value and the purchase price; (b) you’re not willing to lower your sales price; and (c) you and the buyer can’t find a middle ground, then the parties can terminate the contract and everyone can move on. You can find another offer and start over. The only difference is if it was an FHA appraisal, the value of that appraisal sticks with your home for three months. If you try to sell your home during those three month, you basically can’t sell it for more than whatever the FHA appraiser appraised it for, unless you can find a cash buyer or a buyer who is willing to put up the additional cash his lender will require if he agrees to pay more than what the house is worth per the appraisal. For most people, this means they either have to reduce the price or wait out the three months.
  4. FHA appraisals are more thorough than regular appraisals, and the appraisers can require the seller to make all sorts of repairs before they approve the property. The most common ones I see in homes that are generally well-maintained are peeling paint-related repairs. The FHA appraiser will want peeling paint repainted on ceilings, walls, outside, and just this January I had one where they wanted the tiny space between the window sash and the outside part of the window repainted. It was so hard to see that it took half a dozen phone calls before anyone even understood what the appraiser was talking about. I had one last year where the FHA appraiser demanded (and got, incidentally) an entirely new railing for the deck in the backyard. If the house is not in good shape overall, the FHA appraiser is going to want a whole lot of things repaired before he will approve the home for an FHA loan. This could increase the seller’s cost substantially.

Like I said, you may not have a choice. That FHA offer may be your only offer.  But at least now you can go into your transaction with your eyes wide open!