Can You Afford to Say No to FHA Borrowers?

By Robert Freedman, Senior Editor, REALTOR® magazine

Hopefully you don’t consider it a mark against buyers if they want to use FHA financing. It’s true it typically takes longer to process FHA-backed financing than it does conventional loan applications, but with the challenging credit environment, for a big chunk of your potential clientele the only financing available to them is FHA. What’s more, these days it’s taking longer to get conventional financing applications processed, so the time gap between the two has narrowed considerably.

Yet here in NAR we continue to hear that sellers—and some sales associates—are discouraging FHA borrowers from making offers on homes in the outdated belief that FHA is significantly slower and more paper-intensive than conventional financing.

Not true, says NAR Senior Policy Analyst Megan Booth. While it’s the case FHA still requires borrowers to jump through some hoops that don’t apply to conventional borrowers, the agency has undergone a sea-change in the last several years in the way it does business.

The agency is far more flexible and far more quick in its processing than it ever was in the past. Even its appraisal requirements are very much like those in the conventional market.

What’s more, FHA has just made some rule changes that increase the attraction of its financing for condos, including site condos. If you’re not familiar with site condos, they’re units in developments that look and feel like single-family communities but are structured as condos. We’re seeing more of these types of communities and FHA has moved out front by changing its rules to accommodate them.

To be sure, the agency faces challenges, but it remains that rare federal agency that is growing (35 percent of residential loans today) and making money for the federal government.

If you have FHA borrowers interested in a listing, can you afford to discourage them from making an offer? FHA is not the agency it was 10 years ago; you might be surprised at how the Depression-era mortgage insurer is moving into the Twenty-first Century.

Robert Freedman

Robert Freedman is director of multimedia communications for the NATIONAL ASSOCIATION OF REALTORS®. He can be reached at

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  1. Most of the time it is the FHA that says no to the loan because of issues that conventional loans have no problems with such as an unpermitted improvements.

    Conventional loans are always better for the seller than VA or FHA, but I agree sellers should not say no just because it is FHA or VA, but they should look at their property closer to see if it meets FHA and VA guidelines.

    Why is the government pushing these zero down and low down payment loans anyway, is that not part of the reason many people are selling Short or getting foreclosed on? It continues to inflate prices, and put people in a home with no equity to start off with, so if the price drops they are underwater.

  2. In the Marylnad area per MAR statistics over 80% of the homes sold over the last quarter were financed with FHA loans. If you are a seller who does not accept FHA contract you are effectively excluding 80% of the market.

  3. Denise Meek

    When a Seller looks at an offer, it should never be about just one thing. It’s the whole package. In this market, Sellers should be thrilled for any qualified Buyer – period. With a good Loan Officer, these Buyers have strict guidelines that must be met. I believe the reason for so many Short Sales and Foreclosures was because these Buyer’s got into loans that didn’t have the guidelines FHA and VA loans have. They are there to help the Buyer succeed. A-Paper Conventional loans, too, but of course, the Buyer’s need more money down. And when a home is purchased, the appraisal is all about the value. It’s whatever the market bears, so most don’t have alot of equity at first. History tells us that values do go up, so put your people in loans so they can eat! It’s never just about one thing.

  4. As agents we need to accept the fact that FHA is a great way to sell homes. If your Loan Officer is aware and educated there is no reason an FHA loan can not close as easily as a conventional. In fact, in some ways FHA is preferable. We need to get over the idea that every offer needs to be from a conventional, 20 cash buyer. Our first time buyers and FHA buyers are more motivated and more willing to wait out the issues of the market than many investors are. As Realtors® it is our job to educate the buyers. Lets do our jobs!

  5. The other HUGE factor is the 6% towards Buyer’s allowable closing costs
    that is the unspoken double edged sword in the deal. Of course the Seller would have to be really desparate to sell OR the PRICE just jumps up to cover this…(even less equity for the buyer) Amazingly these costs are NOT, at least in our MLS / County records, even considered important enough to mention, and as they are optional onot all transctions will be the same, some 2% or 4% . For all parties to the transaction… remember the bottom line, net. The positive light here is that the Buyers have that much MORE cash in pocket post-closing ! Leveraged into the deal ?, YES but let me ask would you rather add $75.00 to your $1,200.00 a month payment (assuming you qualify) and keep $12,000 in your SAVINGS account…. or move in with 0 in the savings acct. and keep the payment the same ? The bean counters are working them selves up… BUT OVER 30 YEARS… that’s like $30,000 in interest ! – To them I say, hey after thirty years You own it baby !

  6. As a selling agent, I’ve never had a problem with buyers and FHA financing. I continually “view” the properties we visit for FHA guideline problems and I explain this several times to the buyers. If certain “problems” are not fixed either by the seller or by the buyer, they won’t get the mortgage.

    As a listing agent, I certainly inform my sellers about “problems” with their properties that need tending to; otherwise, they’re eliminating a significatn and growing segment of home buyers.

    I’m just really pleased 3.5% downpayment of buyer funds is required. 100% should have NEVER existed for ANY loan.

  7. John

    From the point of view fo representing the buyer, I doubt you fulfill your obligation to them if you do not explore FHA (or any program) financing as the situation dictates. A minimum down payment Conventional loan will cost the borrower more for PMI than the FHA MIP will cost for the same loan. I am not seeing any difference between processing time for either loan in Houston, therefore, it is not a “drag” on the transaction for sellers.

  8. Karen

    I have several FHA buyer’s, my biggest problem is getting the bank REO to accept the FHA loans. If I could convince the banks to take the FHA buyer I would be in great shape. The one good thing about FHA loans is the buyer must be owner occupied, which is great for nieghborhoods.

  9. Sam Kazemi

    I sold residential properties in Midwest part of the country for many years were FHA is a predominant financing. Since 2 years ago I moved to Southern California I am finding out how local real estate agent are unfamiliar with FHA loans. Uneducated agents are causing many properties selling at below market value to investors or cash rich buyers resulting in further decline of property values and depriving FHA pre-approved borrowers that are mostly first time buyers to miss out on this opportunity to become home owners. I have written several FHA financing offers and have lost the bid to these non FHA buyers that bought the properties at lower price than my clients had offered. In my opinion these agents ARE NOT acting in the best interest of their principal therefore they are not professionals and are hurting the market as some did in years past to get us in this mess we are in now!


    Sam Kazemi

  10. It would be great if we could use FHA financing in Manhattan. Generally a minimum of 10% (usually 20%) down is required. With an average price of $1.2 million, getting a client approved can be challenging in this environment. I guess we all have to adjust to this changing market.


    Lee Williams

  11. This is very encouraging for Agents to hear. The market can be very discouraging to home buyers right now who are really trying to take advantage of the market and get into a home.

    But if we can continue getting the word out that FHA has improved and especially in today’s market where the FHA 203K can really play a big role then the average home buyer who may have less funds for a down payment can benefit from today’s market as well.

    Good Luck,
    Marvin Hernandez

  12. We tend to find home buyers afraid of the entire FHA process and look the other way at distressed properties. More education and training on the benefits of programs like 203K will help reduce short sales and foreclosures in the future.