Why sellers don't like your FHA offer

    I’ve had a couple of conversations with Eastside home buyers over the last week about what makes a compelling, irresistible offer, and thought I would address one of the most common questions asked:

Why, if a seller nets the same amount, do they care how much a buyer’s downpayment is?

And why is it virtually impossible for a buyer with an FHA/3.5% downpayment loan to win a home these days?

It’s a great question, and a timely one, as first-time buyers scramble to get into the market before mortgage rates spike.

There are a few factors working against FHA buyers, which become especially apparent in a seller’s market like the one we are in today.  With lots of offers from which to choose, the low downpayment ones are usually the first to be eliminated, and here’s why:

1)  Buyers without a lot of cash on hand are perceived as a riskier loan, and sellers are afraid your loan commitment will fall through.

2)  Buyers without a lot of cash on hand cannot typically afford lots of repairs, and sellers are afraid you will cancel if we discover the slightest thing needing work.

3)  In the old days (<2005), FHA loans took much longer to close than conventional loans, and sellers do not want to wait any longer than necessary to get their money.

4) And the biggest reason…homes purchased with FHA loans must meet higher standards of “habitability” than do those purchased with conventional loans.

This means that when an FHA appraiser comes out to evaluate the home, he will be noting cracked window panes, peeling paint, the functionality of all utilities, heating system, etc.  Any problems noted result in a laundry list of items that must be corrected prior to the loan being approved, and what seller wants to be presented with a list of corrections that need to be made?

When appraising a home for a conventional loan, appraisers are more focused on the value than the condition, and therefore strike much less fear into the hearts of sellers and their agents.

Now I speak from experience when I say that much of the prejudice faced by FHA buyers is unwarranted and unjustified, and that I have had many, many FHA transactions go just as seamlessly as any other transaction.

It is sad that the very loans designed to help low-downpayment buyers have such a stigma, and if given a choice, will be rejected by most sellers out there.

So, what’s an FHA buyer to do in order to compete?

That’s an easy one, though you may not like the answer:  write a compelling personal letter, offer to buy the home as-is, and/or offer a too-good-to-pass-up price.

If you can’t compete on the downpayment front, oftentimes you can compete in other creative ways that appeal to a seller.  At the end of the day, though, the cold, hard truth is that “cash is king”, and you usually have to be very aggressively generous to compensate for the perceived weakness in our offer.

All home sellers want is an easy transaction that closes without a hitch, and many times it is the first-time buyer who is the most motivated to complete the sale and do everything they can to make it happen.

Here’s hoping that one day soon when the market shifts (and it will), sellers will be clamoring for your attention!

Want to buy a home with an agent who knows how to get your offer accepted in any kind of market?  We’d love to help you!

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About Elise Knepper:

Elise Knepper is an award-winning Realtor specializing in gorgeous homes from the Hollywood Hills to Pasadena. With over a decade of experience serving buyers and sellers, she covers the LA real estate market for Examiner.com, loves exploring the city's neighborhoods, historic architecture, and all things design.

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4 Responses to “Why sellers don't like your FHA offer”
  1. Elie Rodriguez

    Thank you so much for spelling the fha loan stigma out! My husband and I have just submitted an offer to buy a home and we went 3500 over hoping to entice the seller. Well they contacted our realtor shortly after asking if we could switch to cash or a conventional loan; they loved the offer but not the funding:( Our realtor rallied for us but we still have to wait for a decision. It really makes homebuying discouraging as first time buyers. Really hoping they take a chance on us!

    • Elise Knepper

      Good luck, Elie! FHA loans are not bad products at all, but sellers are afraid of them. It will usually just come down to what other offers they have, if any. It was smart of you to offer over asking and try to tempt them!

  2. Natalie

    We just offered 40K above asking price and were rejected. We don’t know what to do in this crazy market! The houses are gone in just a few days here in Colorado. Perhaps we should just save more?

    • Elise Knepper

      Natalie, that sounds very much what it is like here in LA. Yes, I think you will have to compensate on your offering price if you have a low downpayment, or save just a little bit more to get you out of FHA. If your offer is weak in any area, it is also a good idea to write the seller a letter about yourself, enclose pictures, etc to try to woo them via the heart versus the wallet!

Chime In!