Dear Phyllis,
My husband and I want to help our son and daughter-in-law purchase a home. We won’t be giving them a 20% down payment, but likely close to 10%. I spoke to our bank branch manager who suggested that they obtain an FHA mortgage as they allow lower down payments. When we met with our Realtor®, he told us that most home sellers frown upon FHA financing. Why would the seller care what kind of loan the buyer obtains? Are FHA buyers really at a disadvantage?
Puzzled
Dear Puzzled,
Congratulations on helping your son and daughter-in-law purchase their first home. Interest rates are low and can be cyclical.
A buyer’s perspective: They listen to the news and are sometimes a bit skittish about jumping into the housing market. Well priced homes which are move-in ready are in hot demand (especially in the lower price ranges). Frequently they sell in multiple offer situations.
A seller’s perspective: If their home is well priced, the seller had a lot of showings. They may likely have more than one offer. FHA loans have different underwriting criteria than conventional loans. The biggest obstacle to FHA loans is the appraisal. The appraisers are much stricter and often add conditions to the appraisal. For instance if the appraiser notes any peeling paint, it will need to be removed prior to closing. In over twenty years of selling real estate, I have never seen an appraiser make this condition for a conventional loan.
If your son is in a more competitive price range, bidding on move-in ready homes (one that will qualify for FHA financing), his having an FHA loan will be a disadvantage. Because the seller’s Realtor® will know of the potential pitfalls, in a multiple offer situation, his offer will be less attractive. There is another type of FHA loan you should look into; it’s the FHA 203K. This loan funds the buyer’s repairs and improvements after the buyer closes escrow. It is much less common, more complex and you should only deal with a lender very experienced with this type of financing.
Related Post: Buying in a Seller’s Market
