This might be a new concept to you. An offer is an offer, right? Most sellers are just happy to get any offer, even lowball offers are at least some activity on a listing even though they usually evoke insults rather than excitement. But if you ever thought about the type of financing when accepting an offer?
Your listing agent should definitely inform you of the different types of financing that could be available from incoming offers. Buyers will usually either pay cash, or obtain financing through one of the various types of mortgage loans; conventional, FHA, VA, USDA or even owner financing. Owner financing of course is the one that stands out for sellers the most as it’s the one they will be extensively involved with, but FHA, VA and USDA also require a little bit of seller involvement.
An FHA is backed by the Federal housing administration and borrowers will pay for mortgage insurance protecting the lender from a loss if the buyer defaults on the loan. This can add a few hundred dollars to the loan each year until it is removed. Just about any mortgage officer or lender can offer an FHA loan and borrowers are responsible for 3.5% down payment rather than the typical 10-20% on a conventional loan.
If your buyer presents an offer with a financing contingency based on an FHA loan, it helps to understand the details behind it. Most issues are non-issues and many times loans go through just fine, but there are details you need to be aware of. Understanding all of the factors involved will let you make a better decision on whether or not to accept an FHA loan.
You’re selling a condominium.
If you have a condominium, townhouse or loft that you’re trying to sell, the condo association must be approved to accept FHA loans. Not all FHA lenders will approve a complex. FHA is looking for financial stability in the complex or Association and there are several requirements including no more than 50% of the property is used for commercial space, at least 50% of the units must be sold prior to endorsement, no more than 50% of the homes were bought on FHA loans, no more than 50% of the units can be rentals and no more than 15% of the units can be in arrears more than 60 days. If the complex meets all of these requirements then you should be able to get an FHA approval. We want to make sure that your complex accept FHA loans before listing the property and accepting an offer. Usually your listing agent will present this information in the personal remarks upon the listing.
If the home needs repairs.
Typically, a homes that sell “As Is” are in need of repair and many FHA loans will not be approved on a home that is in dire need of a lot of repairs. There are common inspection issues that many FHA inspectors will flag by an appraiser including peeling paint in homes constructed prior to 1978, inoperable heating and cooling systems, exposed wiring, duct-work or piping, broken windows or gutters, pest issues, standing water, mold or mildew, faulty issues and water heaters or furnaces, exterior doors that are not secured or hazardous and safety issues. If you’re unsure of whether or not your home needs these types of repairs, talk with the listing agent prior to listing the home and accepting FHA offers. If the listing agent feels that the home has it too many repairs to accept an FHA offer then you can either take care of these issues ahead of time or simply not accept FHA offers.
Low appraisal issues.
If the appraisal comes in lower than the asking price or even the offer price, you can run into problems selling to an FHA buyer who’s planning on making the minimum down payment. If the home is appraised for lower than the agreed-upon price, this translates to the lender that the buyer is asking for more than the house is worth from the FHA lender. The only option is to sell the home at the lower price or refuse the offer altogether. Selling to a conventional buyer, one in which can make a 20% down payment, this usually will not be that big of deal. The buyer can typically bring in extra cash to make up the difference if they choose and you can still sell at the higher price.
A buyer with less than perfect credit.
Most buyers that use an FHA loan are either first-time home buyers or those with less than perfect credit. Buyers can apply with credit scores as low as 580 where traditional loan usually requires at least 620. Borrowers with the less than 580 will need to put 10% down, which may be difficult to do. You’ll want to make sure that the buyer is pre-approved, even though this is not final approval. If you know that the buyer has at least on some financial homework and has the money for an earnest money deposit, inspection and down payment, and they have been pre-approved, the deal most likely will follow through. However, this is something to be aware of; everybody has to start somewhere.
Accepting an FHA offer is really no different from a conventional but there are different stipulations and requirements and applying for the loan. These are things to be aware of so that you’re not blindsided with major financial issues down the line. It’s good to know the differences between the loans so that you are well aware of what you’re dealing with.
For more information on FHA loans, getting pre-approved, listing your home or if you simply have questions about real estate in Ozaukee and Washington County contact my office today.