While mortgage loans insured by the Federal Housing Administration offer advantages for buyers and sellers alike, there can be some disadvantages. Most times, though, accepting an offer from an FHA homebuyer isn’t any more risky to the seller than accepting an offer from someone applying for a conventional mortgage loan. Despite the drawbacks and number of other home loan programs available to consumers, FHA loans remain the loan option of choice for many buyers.
Because FHA loan programs backed by the Department of Housing and Urban Development are intended to help low- to moderate-income Americans own their own homes, there are limits on how much a buyer can borrow. Mortgage limits vary by region. In addition, FHA limits how much lenders can charge buyers in loan fees. If a lender’s fees exceed the amount allowed, the seller must agree to pay the additional costs for the deal to go through. FHA loans also require more underwriting and often take longer to close. Consequently, sellers don’t always consider offers from FHA homebuyers, especially in a highly competitive real estate market.
To qualify for an FHA-guaranteed mortgage loan, the home must meet HUD’s minimum property requirements. FHA-approved lenders sometimes have additional requirements of their own. An FHA appraiser visually inspects the property and reports his findings. Although an FHA appraisal is not the same thing as a home inspection, if the home fails to meet FHA minimum health and safety standards, either the seller must agree to make the necessary repairs or the buyer must pay for the repairs at closing, according to Zillow. The money for the improvements is held in escrow until the repairs are completed.
According to FHA guidelines, a seller may contribute toward a buyer’s closing costs, including inspections, appraisal fees and discount points. Buyers and sellers often negotiate these fees if a home appraises lower than the sales price. Although sellers can contribute toward these costs, FHA mandates that a seller may contribute no more than 6 percent of a home’s sales price. Otherwise, the FHA lender must reduce the amount of the loan. In addition to contributing toward the buyer’s closing costs, a seller must still pay the usual seller-paid fees required by state and local law, which do not count toward the 6 percent limit..
Assumable Mortgage Loans
Homes for sale that are already financed with a mortgage loan insured by the FHA have the advantage of offering an assumable mortgage. While conventional loans usually aren’t assumable, a buyer who qualifies can assume an FHA mortgage at the existing loan terms and interest rate the seller is paying. This can be a major benefit to a buyer when interest rates are higher than what the seller is paying and as long as the seller doesn’t have much equity in the house, James Hines, a financial adviser at Wells Fargo, told Bankrate. When assuming a mortgage, you must still go through the loan application process and be approved by the seller's lender.
- Realtor.com: Understanding FHA Loans
- Zillow: Complete Guide to FHA Loans and Mortgages
- FHA.com: What Costs Can the Seller Pay for the Buyer with an FHA Loan?
- Bankrate.com: Assumable Mortgage -- Take Over Seller’s Loan
- Nolo. “Seller Financing: How It Works in Home Sales.” Accessed March 9, 2020.
- New York State. “Real Estate License Law,” Page 37. Accessed March 9, 2020.
- Federal Reserve Bank of St. Louis. “Local Predatory Lending Laws: Going Beyond North Carolina.” Accessed March 9, 2020.
- Cailber Law, S.C. "Land Contracts.” Accessed March 9, 2020.
- California Legislative Information. "Article 3. Disclosures on Purchase Money Liens on Residential Property." Accessed March 9, 2020.
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Amber Keefer has more than 25 years of experience working in the fields of human services and health care administration. Writing professionally since 1997, she has written articles covering business and finance, health, fitness, parenting and senior living issues for both print and online publications. Keefer holds a B.A. from Bloomsburg University of Pennsylvania and an M.B.A. in health care management from Baker College.