There’s no sugar-coating it: an FHA offer does not look as strong as a conventional loan offer.
But that doesn’t mean you’ll never get your FHA offer accepted. Millions of people have purchased a home with FHA and will continue to do so.
Here’s how to have the best chance of getting your offer accepted as an FHA buyer.
Ways to make your offer look stronger
Now that we know you will have a tougher time getting an FHA offer accepted, what do you do about it?
1. Get a full pre-approval
Get a fully-underwritten pre-approval before you make an offer over a simple pre-qualification. A pre-approval means an FHA underwriter examined all your documents and signed off on everything except the property.
Get an FHA pre-approval. Start here.
2. Request a letter detailing your creditworthiness
Many states have banned “real estate love letters” about how your kids are going to love sliding down the banister to morning pancakes. But it’s still legal for your loan officer to write a letter saying that you have good credit and income, have sufficient assets to close, and are fully approved by an FHA underwriter.
3. Switch to conventional
In competitive markets, sellers simply remove all FHA offers from the stack. In this case, see if you can switch to a conventional loan. Conventional loans come with down payments of as low as 3%, even less than FHA.
Contact a lender to check your conventional loan eligibility.
4. Increase your earnest money
More earnest money makes your offer look stronger. It shows you’re serious. Plus, the seller can use this money to re-list the home and find a new buyer if the sale falls through for a reason not covered in the contract.
5. Put 5-10% down
While 3.5% is the minimum for FHA, you can put more down. While you’re at it, see if the larger down payment qualifies you for conventional.
6. Make a full-price offer
Sellers have a lot of pride in their homes. Receiving a full-price offer – or maybe even above asking price – boosts their ego and increases your chances. But don’t offer too much, since the seller knows you can bail without penalty if the home doesn’t appraise.
7. Pay your own closing costs
Sellers often count every dime. They might choose an FHA offer that requests no closing costs over a conventional offer with $5,000 in closing cost assistance. At the end of the day, your offer puts $5,000 in their pocket.
Check your eligibility with a lender. Start here.
Why don’t sellers like FHA offers?
To tackle the challenge of getting your offer accepted, it helps to know why sellers don’t like FHA offers.
1. Misperception of FHA buyers
Home sellers and their agents incorrectly perceive FHA buyers as shaky. If denied during the process, it would leave the seller trying to find a new buyer.
But data from the Consumer Finance Protection Bureau says about 18% of FHA buyers are denied versus 16% for conventional buyers.
(This doesn’t mean that this many home purchases fall through. Most loans are denied long before that stage.)
Additionally, FHA buyers don’t have terrible credit. Only about 11% have a credit score below 620, says a report from the Department of Housing and Urban Development (HUD).
2. Sellers fear the appraisal coming in low
An FHA buyer can walk away from a purchase without penalty if the property appraises for less than the sales price.
So if you make an offer at $250,000 but the home appraises for $240,000, you can walk and keep your earnest money.
It’s called the FHA Amendatory Clause, and you can’t sign it away even to make your offer look stronger.
Additionally, the lower appraisal follows the property for 120 days. The seller must use that value for future FHA offers. Many sellers would rather avoid the risk and accept conventional offers only.
3. Passing the FHA appraisal
Sellers also believe FHA property standards are tougher to meet. An FHA appraiser might be picky about a few more things. But quality homes will pass an FHA appraisal just fine.
For all these reasons and perhaps more, sellers are hesitant to accept FHA offers.
Get your offer accepted
Buying a home with FHA is more difficult, but entirely possible. It starts with finding the best FHA lender, which can offer you a solid pre-approval letter.
