Can a seller refuse an FHA loan?

Quick insights

• A home seller has legal rights to refuse an offer with an FHA loan, so long as the seller complies with the Fair Housing Act.
• When a seller has multiple offers to choose from, there are a few reasons they may decide against an offer with an FHA loan attached.
• However, sellers are still obligated to comply with the Fair Housing Act, an extension of the Civil Rights Act of 1968, which disallows discrimination based on specific protected characteristics.

FHA loans, insured by the federal government, offer a valuable option for homebuyers who may not qualify for a conventional home loan due to factors like lower income or credit scores. While FHA loans involve specific requirements and steps, they are designed to be accessible and supportive for buyers with diverse financial profiles. Both FHA and conventional loans typically involve a thorough review process, and both may take longer to process compared to cash offers. Ultimately, the choice between loan types depends on the individual circumstances and needs of the buyer.

In this article, we will dig into the reasons a seller may be hesitant to accept an FHA loan, including circumstances where they may be rightfully refused.

Can a seller legally refuse an FHA loan?

Yes, a home seller is within their legal rights to refuse an offer with an FHA loan. Sellers have the discretion to select the offer that aligns best with their interests. In a “seller’s market,” where multiple offers are available, some sellers might prefer cash offers or conventional loans due to perceived simplicity. However, it’s important to note that FHA loans are a viable option and can be competitive, especially in a “buyer's market,” where sellers have fewer offers to consider. The choice often depends on the specific circumstances and preferences of the seller.

Why sellers may hesitate to accept FHA loans

Why don’t sellers like FHA loans? While FHA loans have advantages for certain homebuyers, the process and requirements present a few potential drawbacks for those selling their home. Let’s examine some of the disadvantages of an FHA loan for sellers:

• Stricter appraisal requirements: All home loans are bound to include a home appraisal step that allows the lender to confirm the property’s value. But when it comes to FHA loans, there is a specific process.
• Potential for required repairs: FHA loans include specific appraisal and inspection standards aimed at ensuring the property is safe and structurally sound, beyond just assessing its market value. Sellers may be required to address certain repairs or improvements identified during this process, which can involve additional costs and effort. While these measures are intended to protect the buyer, they may make an FHA offer less appealing to sellers who prefer a more straightforward transaction.
• Longer closing times: Because of some specific steps and possible repairs needed with an FHA loan-backed offer, the sale may take longer to complete. This can be discouraging to sellers, particularly those who want to sell their property as quickly as possible.

What the Fair Housing Act protects

Sellers must comply with the Fair Housing Actec-the-fair-housing-act, an extension of the Civil Rights Act of 1968, which prohibits discrimination based on specific protected characteristics. These include race or color, religion, sex, national origin, familial status or disability.ec-the-fair-housing-act While FHA loans are often described as being geared toward low- and moderate-income individuals, income level is not a protected trait recognized by the Fair Housing Act. However, a seller cannot legally refuse a buyer solely based on assumptions about the buyer's financial status or other characteristics inferred from their use of an FHA loan.

Mitigating the drawbacks of an FHA loan

Regardless of the market, FHA loans are used by buyers year-round in all parts of the country to buy homes. Sellers looking to manage the potential drawbacks of these loans may want to consider the following strategies:

• Schedule a pre-listing inspection: Having a professional inspection completed on your home can help identify potential repairs ahead of time. This may help reduce the amount of time to close on a home sold with an FHA loan in tow, or any other kind of loan which may require inspection.
• Consult with a real estate agent: Certain real estate agents may be more knowledgeable about FHA requirements than others. A seller anticipating offers with FHA loans may want to consider communicating with an expert ahead of time to prepare.
• Prepare to negotiate costs: As is the case with any home sale, the buyer and seller can negotiate the price and repair costs to the satisfaction of both parties. For example, if repairs are required at a specific listing price, the seller could choose to lower the price in response.

In conclusion

Each seller is different, and fluctuations in the market may make an offer with an FHA loan appealing regardless of the complexities that come with it. Sellers have the right to choose the offer that best suits their interests, short of discriminating based on protected characteristics. If you’re planning to buy a home soon (using an FHA, conventional or other mortgage loan), consider reaching out to a Chase Home Lending Advisor.