Q: My wife and I put a very good offer on a house in West Mayfair, but the seller turned it down because we are using an FHA loan. We don’t have enough money saved to switch to a conventional loan. What does mortgage financing matter if we are paying what the seller wants?
A: Federal Housing Administration loans are good for buyers who don’t have much cash because they require a down payment of only 3.5 percent of the purchase price. Also, the interest rates on FHA loans are almost as low as certain conventional loans. But an FHA buyer comes with some strings attached for a seller in the form of an FHA appraisal.
An FHA appraisal is different from a conventional appraisal because the FHA appraisal has requirements for sellers that the other doesn’t have. Two problematic things that an FHA appraiser must consider are:
- CONDITION: The property condition must meet certain requirements. They are usually safety issues, but not always. If the FHA appraiser decides the property needs new outlets or peeling paint needs to be re-painted, the seller is responsible for making the repairs before settlement. This can become costly if there are large or many repairs.
- SALE PRICE: The property must sell for no more than the appraised value. If the FHA appraisal comes up with a lower-than-asking number, the sale is automatically compromised. I have experienced FHA appraisals coming in lower than the sale price, and the sales ended up either terminated or the seller had to come down in price. Sometimes it makes sense for a seller to reject an FHA loan because of the risk of an unfavorable FHA appraisal.
Stacey McCarthy is a real estate agent with the McCarthy Group of Keller Williams. Her Real NEastate column appears every Wednesday on NEastPhilly.com. See others here. Read other NEast Philly columns here.