Home Buying in San Jose>Question Details

Shirley Cheng, Real Estate Pro in Willow Glen, San Jose,...

Does it really make a difference between a a offer from a FHA buyer and a Conventional buyer?

Asked by Shirley Cheng, Willow Glen, San Jose, CA Tue Jun 26, 2012

Help the community by answering this question:


Hi Shirley,

Quite simply, some Listing Agents/Sellers shy away from FHA financed offers because they do not completely understand them and when you are in the middle of a large transaction going with "what you now" is just an easier decision.

Truth be told, FHA financed purchases are no more difficult than conventional financing in my opinion. Aside from a Condo project that is not FHA Approved, FHA financing typically only gets difficult when there are "Health & Safety" concerns associated with the property; however, so do conventional loans.

Below, Tim stated:
"FHA scares some sellers more than conventional because there is a FHA inspection that must be done where the conventional does not have to have an inspection.”

In my experience, I have never had a specific separate Health & Safety inspector visit a property. What has taken place is that when an FHA appraisal is performed on a home the appraiser is also performing a "Health & Safety inspection" as well - main focus being the identification of safety hazards the house is structurally sound. Conventional appraisals could also cover some of the same issues. For example, I have had conventional appraisals condition a patio railing be constructed and a stove be installed.

In various areas of the FHA Appraiser's Handbook there is clear direction to have the Appraiser note safety/hazards for repair. For example:

"Required repairs are limited to those repairs necessary to preserve the continued marketability of the property and to protect the health and safety of the occupants."

"The property must be free of all known hazards and adverse conditions that: may affect the health and safety of the occupants.."

"The appraiser must note and make a repair requirement for any health or safety deficiencies as they relate to the subject property,.."

What actually constitutes a "health & safety" issue was revisited in a 2005 Mortgagee Letter (this is how FHA changes/clarifications are announced). There are many examples of items that DO and DO NOT fall under the category of a "health & safety" issue. http://docs.steven-anthony.com/ML05-48-Repair-InspAppraisalP…

2 votes Thank Flag Link Tue Jun 26, 2012
I think it's really 100% a myth that FHA buyers are harder to close than conventional. Many people confuse FHA with VA (VA requires a termite clearance). And the appraiser is just as likely to ask for things to be fixed with a conventional appraisal than with an FHA appraisal. And I think conventional appraisals can actually be more conservative than FHA appraisals. It's really a shame for FHA buyers out there that listing agents discriminate against them in favor of conventional loans.
1 vote Thank Flag Link Sat Jun 30, 2012
It depends on the buyer's situation. Some have great income, but low savings for down payment. 75% of buyers use FHA today. Not exactly something a seller wants to snub, generally speaking.
1 vote Thank Flag Link Sat Jun 30, 2012
Absolutely... Don't really care about the small difference in downpayment if it's 5% vs 3.5% ... but not having to deal with FHA inspection/appraisal is certainly a consideration for a seller.
1 vote Thank Flag Link Sat Jun 30, 2012
With all of the long explanations, the truth comes down to this. Inventory is light everywhere so an FHA buyer is going to be at a disadvantage because the perception is that they are not as strong of a buyer or if the property has condition issues FHA will deny the deal.

That being said if the property is in excellent condition and the borrower is paying less than 20% down FHA can be an advantage because it does not require separate pmi approval.

But the perception is that an FHA buyer is harder to close and an inventory situation like we have now is what most sellers go off of.
1 vote Thank Flag Link Wed Jun 27, 2012
This thread is an interesting read on how little has changed about the misperceptions about FHA financing. In many high cost areas such as Santa Clara County, it could be the only choice available. The conforming limit is $625,500 in SCC and the FHA limit is $729,750. If you are trying to sell a property in SCC with a loan amount above $625,500 you had better rethink FHA. FHA is no harder to qualify for than conventional loans are and agents should be educating the sellers about what it really is.

A FHA buyer with 3.5% down is a lot easier to close than a conventional borrower with 5% down in my opinion. MI companies have strict guidelines for mortgage insurance whereas with FHA you don't have to deal with that. Far too many people are making invalid judgments about "FHA borrowers" as if they are less than qualified. The truth is that there are many reasons that people opt for FHA financing. As I pointed out, in high cost areas it may be all that is available, they may want to put less down to remain liquid or they may simply have a higher debt ratio. None of these makes them an inferior buyer.
Web Reference: http://WeFixRates.Com
1 vote Thank Flag Link Tue Jun 26, 2012
There is no difference between an offer from an FHA buyer and a conventional buyer. Both loans have guidelines that must be followed, and if you follow those guidelines the deal will close and you will get your house sold. That being said, there are differences between buyers that get FHA loans and buyers that get conventional loans.

FHA loans have very expensive mortgage insurance that makes it a more expensive way to buy. As a result, most buyers who can finance with conventional financing will not use FHA; by contrast almost all conventional borrowers can quality for FHA financing. What this does is tell you that in most cases the FHA buyer is less well qualified than the conventional buyer. This doesn’t mean that the FHA buyer won’t qualify. In fact I’ve seen many cases where a lender – especially lenders who are not comfortable with FHA financing - try’s to get marginally qualified buyers into a low-down payment conventional loan but can’t. If the lender knows what they’re doing and the buyer qualifies for the loan they are getting it’s really not an issue.

There is a myth is FHA appraisers will require that the home be in perfect shape. While it is true that FHA does require the appraiser to note issues related to health, safety and structure, it is also true that underwriters will look very closely at these same issue – especially when there is a small down payment – on conventional loans as well. As for FHA appraisals coming in low, I don’t believe that at all. In almost all cases the appraiser that is doing the FHA appraisal is that exact same one who would be doing the conventional appraisal. If the appraisal comes in low it has nothing to do with the type of loan being done; it’s because the property sold for more than the appraiser can document or because the appraiser didn’t do a good job.

In short, if the buyer qualifies for the loan they are getting and the home does not have any issues, they type of financing is really immaterial.
Web Reference: http://www.SacRELender.com
1 vote Thank Flag Link Tue Jun 26, 2012
Well Shirley you have gotten a lot of feed back let me give you my experience recently with FHA. I am having trouble getting properties to appraise with FHA. I have gotten offers accepted, but then the appraisel comes in way low like 40k on one property and 105k low on another and they won't change them when the appraisel is challenged. So you should be aware that even if you get your offer accepted it might not appraise.
At your service,
Certified Distressed Property Expert
1 vote Thank Flag Link Tue Jun 26, 2012
Hi Shirley,

Yes.....FHA has strict guidelines. I'm not a mortgage broker but talk to your bank or mortgage broker to be up to date.
Conventional loan has less guidelines and it is easier for the Seller of the property.

Good luck,
Yvonne Han
DRE# 00811389
1 vote Thank Flag Link Tue Jun 26, 2012
Have to give a "Thumbs Up"...the only time I have ever utilized the services of an FHA inspector (consultant) is for the purpose of doing a FHA 203K renovation loan. If memory serves me correctly (and, sometimes it does/does not!!! :)!!!) "back in the day" (late 80's) FHA sometimes did require an additional inpection. However, that is not the case for quite some time.

As far a whether or not it makes a difference I think that depends on the situation, the borrower, the sellers and the agents...oh, and the property. WIthout a doubt, there are more hoops to jump through when purchasing a condo with FHA financing. For the most part (from a financing perspective) FHA loans require slightly more focus on compliance issues and my borrowers have to sign a few additional disclosures....none of which affect either sellers or agents.

There are a tremendous amount of myths circulating about FHA loans....particularly in California and other higher priced regions. There is a very basic reason for the mistrust of FHA in our market: Prior to the increase in FHA limits in 2009 it simply was not a viable product.

As I recall, FHA loan limits were 137,000 when I got in the banking industry. I lived in the Metro Seattle market and 137K would not buy half a house...unless the borrower was willing to commute an hour or more. Therefore, FHA loans represented less than 10% of most lenders pipeline. California real estate prices were at least 30% higher at the time, so the result was even less FHA.

Many, many real estate AND mortgage professionals had never been involved in any kind of FHA transaction umtil the past couple years. And/or, the very long term agents and MLO remember the FHA "hoops" of years gone by (trust me, they make today's FHA look like a walk in the park)...understandably they are gun shy until updated and educated about the realities of working with FHA in today's market.

I believe the more the agent (listing or buyers) knows about the realities of FHA loans, the less difference it would make.
1 vote Thank Flag Link Tue Jun 26, 2012
Yes, and no. At the end of the day, if the offers are the same, then the seller ends up with the same amount of money regardless of the loan.

From the seller's perspective, if they have multiple offers, they are going to choose the offer they think has the BEST chance of closing. If there's a cash offer, they will go for that...Next in line in desirability is the conventional loan, and lastly the VA loan.

There are a few extra standards required for the property being purchased by an FHA loan, and they do tend to take longer to close.

I DO think that the pecking order is often unfair. FHA loans are intended to get first time home buyers into the market, and yet market dynamics make it more difficult to get an FHA offer accepted.

I wish you luck...and keep going until you get a deal!
1 vote Thank Flag Link Tue Jun 26, 2012
It does for a myriad of reasons such as already told by the others here, however, it shouldn't matter. In my opinion, a conventional buyer can fall out of escrow just as easily as an FHA buyer. In today's market, lending standards have tightened. I recently had a 25% down A+ credit buyer who's lender scrutinized the heck out of them because they owned another property. Eventually, escrow closed, but we had to jump through a lot of hoops!
1 vote Thank Flag Link Tue Jun 26, 2012
Shirley -

I think it depends on several things.

1.) The seller. If the seller is a bank then an FHA is considered a longer escrow and more restrictive on condition of the home and loan approval. Short sale lenders seem to have less issue with an FHA loan as they are typically not a deciding factor on which offer is put forward. Equity sellers can be skewed by the listing agent's opinion/history on FHA offers and may choose a conventional loan over FHA in a multiple offer situation.

2.) Condition of the home. Especially with REOs and Short Sales, the condition of the home can make the FHA appraisal and underwriting process challenging. There must be a stove. Health and Safety issues like broken windows or non-working furnaces can stop a deal in its tracks. That is where a good buyer's agent can manage the turmoil. I have negotiated/installed stoves prior to close of escrow to satisfy FHA underwriting conditions. If all agreeable, FHA can be managed even in homes with challenges.

3.) The loan officer. FHA loan have only been back in our market for the last 5 years. Make sure the loan officer knows FHA and can help prepare appropriately. For example, some lenders still enforce 90 day flip rules, particularly on FHA loans. Also, having a lender/broker that has underwriting "in house" can make a big difference in managing timelines and any issues that come up. An experienced FHA loan officer is huge advantage.

4.) The agents involved. Some people have a bias toward FHA and VA loans. That can make a difference in whose is willing to work with an FHA buyer and what offers are moved forward. With so much "all cash" offers in our local market, FHA buyers have a tougher time having their offer accepted in comparison to other areas of the country. Agent representation can make a huge difference and an experienced FHA buyers agent can make the difference between closing escrow and not.

1 vote Thank Flag Link Tue Jun 26, 2012
Yes it does. First and foremost the condition of the property becomes a bigger issue with an FHA buyer than a Conventional buyer. The conventional buyer is putting a larger down payment 90% of the time and these two factors put the FHA buyer at a disadvantage in this market.
1 vote Thank Flag Link Tue Jun 26, 2012
You are an agent and I'm sure you know the difference.

When I'm presenting an FHA buyer offer I'm going to ask the listing agent to be open to considering the offer. FHA Buyers are so beat up by losing out that they are motivated. Of course if the the house has pealing, chipped paint, and obvious defects then an FHA lender may want those items taken care of prior to closing.

I've had FHA Buyers able to remove their loan contingencies in 15 days and close in 30. Now with the volume of loans these days, even conventional lenders are taking a bit longer.

On the listing side when offers come in I discuss each offer with the seller the benefits and risk. Just because it is FHA I don't automatically put it at the bottom of the stack. It's the complete package. Who's the Buyer Agent? The Lender? The Buyers? What does the Contract look like? If it is professional and well prepared then they are considered.

FHA Buyers need a break so let's give them the opportunity to rise above all the investors.
Web Reference: http://www.terrivellios.com
1 vote Thank Flag Link Tue Jun 26, 2012

Call me so we can see how we can get you a Conventional loan instead of an FHA loan. It is not difficult and a Conventional loan will give you a great advantage over an FHA loan. Also, I can get you approved with a loan number and closing conditions prior to making an offer on a property. Call me 408-316-0793 or email me rpablaza@comcast.net.

Let's work to get you a home.
0 votes Thank Flag Link Tue Nov 20, 2012
Thank you for your question:

Yes, it often does make a difference with the listing agent and the seller whether or not the offer is from a FHA buyer or conventional buyer.

The FHA has a reputation of being difficult to work with.

Buyers and listing agents often prefer a Conventional buyer to a buyer with FHA financing.

If the property for sale is a condominium, the entire complex must be FHA approved. In Santa Clara County many condominium complexes are not FHA approved because the HOA management company was not willing to do the work or release the documents that are required for FHA approval.

In one case, a little over a year I had a client who wanted to buy a property in a Condominium Complex that was not FHA approved. Fortunately that was back in the days when the market was slow and there were no other the buyers.

The seller was willing to give us the time to get the Condominium Complex FHA approved. It took me 3 months to do it.

The hardest part for me was persuading the Homeowner's Association Management company to release the documents that FHA required from the management company for approval of the complex.

The management company considered those documents to be private and proprietary information and initially would not release them to me, or to anyone else. I had to go to the senior management of the management company to persuade them to release the documents to me, so that I could give them to FHA. As it was the senior management of the management company finally approved the release of the documents if I would sign a confidentiality agreement, which I did. Once the management company gave me the required documents, and I submitted those documents to FHA we had our approval within several weeks.

Today in this sellers market I cannot imagine anyone giving you 3 months to get FHA approval for the condominium Comple xif it is not already FHA approved.

Also, for single family homes, the FHA requirements to approve the property to qualify as collateral for the loan are more rigorous than the conventional lending requirements to approve the property as collateral for the loan. .

With these kinds of uncertainties, most listing agents and most sellers prefer an offer with conventional financing over an offer with FHA financing.
Thank you,
Charles Butterfield MBA
Real Estate Broker/REALTOR
American Realty
Cell Phone: (408)509-6218
Fax: (408)269-3597
Email Address: charlesbutterfieldbkr@yahoo.com
0 votes Thank Flag Link Tue Nov 20, 2012
FHA or conventional? Both types of loans will requrie an appraisal and the property in question needs to meet a certain level of condition to avoid denial. Lenders don't want to lend on something that is crap and not worth what is offered....period! Where both of these products get kicked around is the all cash buyer. As an agent for sellers, I like the cash offers (no loan or appraisal contingencies and a quicker close). That may be why your offers aren't getting accepted..BUT to answer this question from a listing standpoint..FHA and conventional loans are acceptable. Price, terms, and qualification of the buyer and their offer will ultimately win out. Hope this helps and the other responses are definitely hitting the same nail.
0 votes Thank Flag Link Tue Nov 20, 2012
I currently have several FHA qualified clients and it is different in the type and area od homes a client is looking at. I have good success in getting clients into their dream home thru FHA. In a multiple offer situation, normally the conventional buyers edge out the FHA client. Price still tops it all for competitions.
Mortgage is secondary.
0 votes Thank Flag Link Tue Jul 3, 2012
Yes.. Mostly because of the FHA appraisal factor. FHA buyer lose out in some market areas as they just can not out bid other buyers and even if they did the property will still need to go through FHA appraisal. Should the property not appraise than the FHA buyer may be asked to come up with the diffference in cash, making it impossible for most FHA buyers. Conv buyer if puting down 20% does not need to worry as much as the amount down will most likely cover the difference.
0 votes Thank Flag Link Mon Jul 2, 2012
Yes, it makes a difference, but it may not be as large as you think. Others have given you some great advice, my one worry with FHA comes when it relates to appraisal since FHA homes have stricter guidelines. Also, like any type of loan, the strength comes with the strength of the pre-approval and how much due diligence the loan officer did when issuing that.
0 votes Thank Flag Link Sat Jun 30, 2012
Hi there, I agree with prior responders. One consideration in evaluating the strength of an offer is the cash in the deal, ie, the down payment. FHA allows for lower down payments and also has broader credit criteria. Another factor that has not been mentioned is that a lower down payment adds pressure to the appraisal. If you you only have 3.5% in the deal, and the bank is financing the remainder, there will be no room on that appraisal.

All things being equal, a seller would choose conventional with its higher down payment and/or cash, with verification of funds.

Jeanne Feenick
Unwavering Commitment to Service, Unsurpassed Results
0 votes Thank Flag Link Sat Jun 30, 2012
An FHA Loan may require more time and conditions from the seller than a conventional so if the "numbers" and "contingencies" are equal, a seller will more than likely choose a conventional or cash buyer.
0 votes Thank Flag Link Fri Jun 29, 2012
Hi Shirley:

Sellers prefer Offers from Conventional buyers with Bigger down Payments.

Sellers feel suspect about offers with 0 or 3.5% down

Also as you know FHA appraisals can be tough.

Good luck.
0 votes Thank Flag Link Fri Jun 29, 2012
Yes, in a competitive situation a conventional buyer will be considered a much stronger buyer than a buyer needing and FHA loan. If the only offer is by and FHA buyer then it really doesn't matter.

Experienced agents know that FHA loans can impose certain requirements that can cost the Seller more money than conventional loan buyers and the good ones discuss this with their Sellers.

Finally from a buyers perspective if you can avoid using an FHA loan you will get a better rate and term then if you use and FHA loan. I do a lot of buyer side brokering and have worked with many hundreds of FHA loan buyers, these loans have enabled nearly all fo them to purchase a home when otherwise they would not have been able to and for them the premium paid in private mortgage insurance etc was well worth it.
0 votes Thank Flag Link Fri Jun 29, 2012
Gregorio is right about FHA misconceptions. While in my market it is absolutely true that FHA is the second choice because of the costs difference, in other markets it might be the better option because as expensive as FHA mortgage insurance is, it’s still probably less expensive then Jumbo Financing.

However the statement about conventional loans usually having a 20% or more down payment is a bit misleading If a person is putting 20% or more down the obvious choice would be conventional financing, however it is possible to do conventional financing with as little as 3% down payment – which is actually less than the 3.5% FHA required down payment. Also FHA loans don’t take any more time than conventional loans do for most lenders – which would include us.
Web Reference: http://www.SacRELender.com
0 votes Thank Flag Link Tue Jun 26, 2012
Hi Shirley,

As mentioned by other agents, there is no difference with an FHA or Conventional loan. It is the downpayment where sellers look. Most fha loans have 3% dp whereas most conventional loans have a 20%+ dp. The seller will always pick the higher downpayment as it has a higher probability of closing.

Also an FHA loan closes 30-45 days, whereas a conventional loan can close as soon as 21 days. Obviously the sellerr will prefer a shorter escrow period (quicker close).

Hope this helps. Call me 408-316-0793 if you have other questions. Thanks
0 votes Thank Flag Link Tue Jun 26, 2012
FHA financing is generally considered to be loaded with more "red tape" than conventional financing. Often the listing agent will advise the seller to avoid a buyer with FHA financing for that reason.

FHA also has more stringent requirements to qualify the property that is being purchased as collateral for financing.

I recommend that if you do need FHA financing that the agent who represents you for the purchase discuss the issure of FHA financing with the listing agent first, before you make your offer. Some listing agents are willing to work with FHA financing and some will not. or are very reluctant to work with FHA financing.
0 votes Thank Flag Link Tue Jun 26, 2012
Without a doubt. The appraisal alone makes a difference.
0 votes Thank Flag Link Tue Jun 26, 2012
We've shifted into a seller's market! When it is a seller's market, you're going to see multiple offers on homes when the price is right.

Any differentiation that makes the seller feel better about the offer could tip the offer. The ways in which you can make your offer stand out:
-fewer contingency days
-nice price
-higher % down payment
-rent back for no fee

These are the kinds of things you see in a seller's market. FHA typically mean a less % down (more risk) and a greater # of contingency days. Both of these factors will hurt you in a multiple offer situation.

In an REO situation, same applies, when the bank makes a decision, they're going to lean towards the highest % down payment possible with all cash particularly interesting.

To get an FHA offer accepted, my recommendation would be to go with a home with lots of days on the market where the sellers will be particularly hungry.

Good luck!

Erica Glessing Nelson
Editor & Co-Publisher
DRE 01425475
0 votes Thank Flag Link Tue Jun 26, 2012
Sellers look at the bottom line, how much will they net on an offer is the key. FHA scares some sellers more than conventional because there is a FHA inspection that must be done where the conventional does not have to have an inspection. FHA can sometimes take longer to get to closing too. But it does not matter too much, each has some advantages and disadvantages. Bottom line is the main thing.
0 votes Thank Flag Link Tue Jun 26, 2012
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