Why do banks turn down the highest offer on foreclosed properties if it is FHA.?

Asked by Jessica, 97503 Thu May 28, 2009

I put a bid on a foreclosed property. The bank that owns it declined our offer becuase we were using an FHA loan and accepted an offer less than the one we made. We chose to use and FHA and keep the money we would have had to use as a down in a conventional loan, in the bank for repairs and emergancy. They get thier money... why turn us down? I was told that FHA loans are more picky about the inspection. But the house was in excellent condition no damage done. I lived next to it as a child and know the wells in the area are excellent.... it had new windows and roof. I can't imagine what the bank was affraid of.

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Grace Hanamo…, Agent, Cupertino, CA
Thu May 28, 2009
Hello Jessica and thanks for your question.

Unless you are the only one making an offer on an REO or short-sale home, the lender is likely to choose the "strongest" offer, rather than the highest offer. Unlike a homeowner/seller who is likely to concentrate more on the "bottom line" (their money after expenses) in evaluating an offer, a bank will be looking at who will exhibits the greatest ability to close escrow and can do so in the least amount of time. So in terms of strength, from strongest to weakest for example, if the bank were to look at several offers, they would choose:

1. Highest Price
2. Highest Down Payment or All Cash
2A. Buyers want money back or concessions?
3. Fastest Close Date or Best Chance to Close Escrow
4. Type of Loan, Amount of Loan
5. FICO scores

Although your offer was rated high in the price category, with only 3.5 percent down payment, it made the likelihood of closing poor especially with an FHA Loan where the seller servicer conditions can be more strenuous than for other conventional loans. If another buyer proposed to purchase the home with all cash, even if the price were lower, the other conditions--highest down, fastest close, no loan--made that offer a much stronger, more desirable offer.

Although I understand your disappointment, there are definitely other homes out there for you to review. In the future, however, if you wish to purchase an REO home, remember to make your offer the "strongest" in the bunch.

Good luck and happy house hunting!

Grace Morioka, SRES, e-Pro
Area Pro Realty
San Jose, CA
0 votes
Dirk Knudsen, Agent, Hillsboro, OR
Thu May 28, 2009
CASH IS KING! Maybe not right but that is how they see it.
There are new laws under Obama that also foreclosures should be offered to first time buyers in some cases as well as those who are using the home as a primary residence. If you looked like an Investor to them they may have gone with an person showing they were going to move in.

If you feel you were slighted than call someone within FHA or HUD. Sorry Jess... bad deal for you.


Dirk Knudsen
Re/Max Hall of Fame
Web Reference:  http://www.calldirk.com
0 votes
Thesa Chambe…, Agent, Bend, OR
Thu May 28, 2009
I have written many offers on bank owned properties using cash, FHA, USDA and conventional loans - it comes down every time to the bottom line. If you wrote your offer and then asked for 6% of the purchase price as closing costs you offer may not have been more. I am not sure how you would or anyone would know the accepted offer was more or less until the property closed escrow.

I doubt that the reason was the FHA loan unless for some reason they knew the home would not qualify for FHA financing.
0 votes
HLR, , Oregon
Thu May 28, 2009
They most likely took a cash offer. The rest, they took someone elses word that there were many problems with the property and would not go FHA.
0 votes
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