Homebuyers with insufficient credit or down payment funds who don't qualify for conventional financing often seek Federal Housing Administration loans. The FHA is a government agency within the Department of Housing and Urban Development that insures home loans, which approved banks and mortgage institutions fund. Lenders file insurance claims with the FHA for reimbursement of losses when borrowers default. Home sellers must accept certain program requirements to sell a home to an FHA borrower.
Financing Disclosure to Seller
You must disclose to a home seller when you intend to finance a purchase with an FHA-backed loan. Purchase agreements require details such as the type of loan, the interest rate and the down payment you plan to use to buy the home. This upfront financing disclosure alerts the seller to the potential strengths and drawbacks of selecting your offer. FHA loans require more rigorous appraisals, the possibility of higher seller costs and protection against overpaying for a home. Whether a seller is willing to overcome the possible drawbacks of working with an FHA borrower ultimately depends on his motivation to sell and how these affect his bottom line.
Aggressive FHA Appraisal Requirements
The FHA appraisal process is more thorough than a conventional loan appraisal. An appraiser approved to inspect for HUD evaluates the property's condition and determines a fair value for the home based on comparable area sales. The appraiser must report defects that might affect the home's habitability and structural soundness or occupant health and safety. If a home doesn't meet HUD's minimum property standards at the time of inspection, the lender may require repairs or may reject the property altogether.
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Additional Costs of Closing
Repairs can increase seller expenses, as most FHA buyers are unable or unwilling to repair a home before closing. An FHA appraiser may request in-depth inspections by licensed or certified professionals for suspected problems with the roof, plumbing, electrical, well and septic systems, the foundation or potential termite damage. The FHA borrower may cover the cost of additional inspections, or may require that the seller pay for them as well as any repairs. Buyers and sellers usually allocate the costs of inspections and repairs upfront in the purchase agreement, but might also renegotiate or allocate new costs as they arise.
Amendatory Clause Protection
The FHA requires that borrowers and sellers sign an amendatory clause to the purchase agreement which stipulates that the borrower may back out without a penalty if the home's appraised value is below the purchase price. The clause protects the buyer from overpaying for a home, but the borrower can choose to pay the difference between appraised value and price out-of-pocket. The amendatory clause is not required if the seller provides the buyer with an FHA appraised value before entering into a purchase agreement.
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