A reader emailed me with the following question:
My girlfriend and I put an offer on a house last week. The house was listed in the upper $500k range, and we offered $25k under asking with $10k in closing costs to be paid by the seller. We had 1% in earnest money included in the offer, are using FHA financing, and are pre-approved for $40k more than we offered.
The seller decided not to counter the offer. They said the decision was based on a number of factors. Our Real Estate agent confirmed that they would accept FHA financing and that this was not the deal breaker. The MLS listing also specifically states that FHA, VA and conventional financing will be accepted.
So we decided to submit another offer on the house. We offered just $10k under asking with no ask for closing cost, but kept the FHA financing.
The sellers decided not to accept the 98% offer or even come back with a counter offer. They said they do not like our financing and would need to see a conventional loan to move forward.
I was curious if you have any data on percentage of loans that close FHA vs. Conventional loans?
Should we expect this type of response from our offers in the $500,000 – $600,000 range? Do we need to think about moving away from FHA in this price range?
It surprises me to hear that there are sellers rejecting qualified offers just because of FHA financing, especially when FHA, Fannie, and Freddie currently account for more than 90% of home lending. I could see why a seller would choose a “conventionally-financed” buyer over an FHA-financed buyer if they had more than one offer on the table, but when it’s the only offer they’re considering that just seems silly.
Since I haven’t done a lot of research on this subject personally, I ran the reader’s experience by Seattle Bubble friend and Licensed Loan Originator Rhonda Porter, who shared these thoughts:
I think it’s unfortunate when sellers do not accept or seriously consider FHA or VA approved buyers. This can be caused by how FHA and VA used to be many, many years ago. An uneducated real estate agent may give bad advice, or a seller with a preconceived prejudice against these programs may feel that these loans are less qualified. They’re wrong. Especially in the King County area in this price range.
My average Seattle-Bellevue client is an FHA buyer who’s using an FHA “high balance” which has a loan limit currently at $567,500. Most have better than average credit scores and plenty of funds for down payment and closing costs. Some opt for FHA because they’re shy of 10% down or because they like the potential of allowing their current low rate FHA mortgage to be assumed in the future should they decide to sell and rates are higher.
Many FHA approved buyers in this price range are people who have been thinking about buying for quite awhile—they’re more educated about the process and have just been waiting for the right time for them to buy. There is nothing “subprime” about them. If I were the buyer quoted above, I would not give up. If I were a seller, I would accept an FHA offer over a conventional offer with less than 20% down.
Here’s a post I wrote a while back on this subject: FHA Financing Not Available on a Listing? BIG MISTAKE
I also consulted another good friend of Seattle Bubble, mortgage and real estate educator Jillayne Schlicke for input on this question. Here’s what she had to say:
I completely disagree with Rhonda’s assertion that there’s nothing subprime about FHA borrowers, even at jumbo loan amounts. I interact with hundreds of loan originators every year and I always ask them what’s the highest credit score they’re able to get approved via FHA. Currently lenders are still making FHA loans with a back end debt ratio of 55 percent. That’s principal, interest, taxes, insurance plus all revolving debt divided by gross monthly income.
With almost nothing down, in a declining market with unemployment still high, I’d call FHA loans still very risky from a lending perspective, even with a decent credit score. It’s no secret that all the marginal borrowers are being funneled into FHA loans while we unwind the housing bubble. If anyone wants to check the FHA default rate of your favorite Seattle lender, let me know and I’ll show you how it’s done via public records.
That said, I concur with Rhonda that sellers who are turning their noses up at ANY offer today are in serious denial. They don’t like the financing? Oh please. Unless this house comes with a magical pink pony that can poop butterflies these sellers are completely delusional.
As a buyer, the best move is to emotionally detach from buying THIS house and wait awhile longer. The buyer will be able to continue to save more money for a downpayment or for the costs of homeownership come AFTER buying a house like appliances, furniture and assorted other things that populate a house like children and dogs and then the cost to replace the carpeting but now I’m getting too many years down the road. Most first time home buyers engage in self deception (when they are using only with the emotional side of the brain) that the mortgage payment is the sole monthly cost of homeownership.
Some time will pass. More distressed inventory in the form of REOs and short sales will hit all neighborhoods soon and often. The seller will be in a much better frame of mind to say yes to that FHA financing and even lower offer, supported by lower sales comps. Or if this house slips through the buyer’s hands, consider it wasn’t meant to be, detach, and find a seller who wants to sell. Clearly this seller does not.
Thanks to Rhonda and Jillayne for sharing their insights!
What about you? Have any of the readers had experience (good or bad) on the buying or selling side with FHA financing? Share it in the comments!