Putting your home on the market to sell is a lot of work. After a flurry of activity in cleaning, packing and staging your home to make it look irresistible during showings, you're finally ready to invite the world in and — hopefully — take your pick of offers. Though you've probably already spent time thinking about your ideal buyer's tastes and needs, you probably haven't given much thought to their financing. After all, as long as they have a loan, shouldn't that be good enough for you? Perhaps.
But understanding your potential buyers' mortgages will help you rank multiple offers with better accuracy. Federal Housing Authority (FHA) loans are quite common, but this type of financing comes with restrictions about the home inspection and appraisal that could sink the deal — no matter how well matched you and the buyer are.
Here’s what to know about FHA loans to make an informed decision about accepting an offer.
What Is an FHA Loan?
Federal Housing Authority loans are mortgage agreements that are insured by the U.S. government. Though the loan itself can be made by any lender willing to front the money to your buyer, the FHA is responsible for insuring the loan. Buyers will pay a percentage of the loan amount up front as an insurance premium as well as monthly insurance payments to the federal government when they pay their bills.
In turn, the government guarantees the bank that the loan will be paid in full. This system allows many buyers who don't have a 20 percent down payment saved up to enter the home market and buy a home. Otherwise, banks might not be willing to lend first-time or lower income buyers the money they need to own a home.
When selling your home, it's not really your concern whether or not the buyer can make the mortgage payments required. That's really the bank or lender's issue. As long as they have approved the loan, you will be paid for your house in full by the lender at closing. That said, subsidized buyers also need to meet additional requirements to satisfy FHA rules, and some of these depend on the condition and price of your home.
FHA Loan Restrictions That Affect Home Sellers
FHA loans (also known as Fannie Mae or Freddie Mac loans) require careful scrutiny of your property before final approval for your buyer. There are several factors that could end up making your sale fall through if your property doesn't align with FHA requirements.
Your Appraisal Is Lower Than the Sale Price
An FHA buyer usually has a low down payment — the minimum is 3.5 percent of the negotiated price. Unfortunately, if your home appraises for less than the selling price, it could put the buyer in a position to borrow more than the government thinks the home is worth — and that won't be approved. That means in order to sell, you'll either have to get your buyer to boost their down payment, or you'll have to lower your price. Even worse, that appraisal will be held on file by the FHA for 90 days, so you're stuck with it for any future FHA buyers that season.
Your Home Doesn't Pass Inspection
FHA buyers are required by law to complete a home inspection to make sure the property is safe and structurally sound. In addition to any glaring structural damage, the inspector will look for missing handrails, broken glass, lead paint, asbestos and more. If your home comes up short in one or more areas, you'll need to repair the problem or back out of the deal. What's more, repairs need to be completed by a licensed contractor who provides receipts for the record, and you'll need to pass a second inspection.
Are FHA Buyers Worth It?
Whether or not you accept an offer from an FHA buyer is up to you. In a slow market, it's probably worth considering. Likewise, if your home is in excellent repair and/or is in a neighborhood with affordable, smaller homes, FHA buyers may well be your target market — especially if your house would make a great starter home.
On the other hand, if you live in a very popular neighborhood and hope to get top dollar for your house, you might want to hold out for a conventional buyer. Likewise, if you're determined to sell your home "as-is," FHA buyers probably aren't a good fit. Your agent will be able to give you a sense of the market and help steer you in the right direction.