Pros of FHA and VA mortgages:
FHA and VA mortgage loans are for buyers with less cash available for their down payment. This enables many more people to buy a home than otherwise would be capable. More buyers to consider your property is good thing in general, but for some sellers considering FHA/VA offers may not be best for their specific situation. FHA is perhaps the most popular and effective government program ever to encourage home ownership, with a long history of success. However, the program can have drawbacks.
Is your property eligible for FHA or VA?
Before considering this question, make sure your home price is below the FHA/VA maximum for your area by searching for "[your county] maximum fha va loan." If you are selling a condo or townhome, make sure your associaton is eligible. For VA loans, all of the FHA loan requirements below applies. Some professionals believe VA loans are more stringent and rigid than FHA loans, others believe they are roughly equivalent in requirements over and above conventional loans. VA stands for Veterans Affairs, also known as DVA for Department of Veterans Affairs. FHA is the acronym for the Federal Housing Administration.
Cons of FHA and VA loans:
Underwriting standards are stricter, which means there is a greater chance of appraisal issues, work orders, loan denial (even after having a pre-approval letter), and/or last minute closing delays compared to a conventional mortgage. Sellers accepting an FHA offer should have a plan B in case of a last minute closing delay, or near closing loan denial.
Is your property a good candidate for an FHA or VA mortgage?
The appraisal process when an FHA loan is involved is quite different to the appraisal process for a conventional mortgage. The FHA appraiser does still assess the market value of the property, but they also evaluate the condition of the property both inside and out. Anything deemed of concern in regards to health and safety, or issues that the FHA believes make the property uninhabitable, will be noted in the appraisal. This has the potential to cause issues for the seller if the property is in need of major repairs.
An FHA inspector could call "work orders" as part of the required FHA appraisal process. FHA work orders happen frequently, especially if there is any peeling paint on the property, which FHA considers a health hazard. We have an even longer and more helpful list available, just ask.
Common issues an FHA appraiser may highlight include:
- Peeling paint
- Unsafe wiring
- Fences requiring repair
- Wood rot
- Unserviceable heating system
- Cracked/broken glass
FHA and VA situations a home seller can find themselves in:
So, who is responsible for the work order repairs? This issue is complex and a number of scenarios may arise:
- The sellers may decide to carry out the repairs, so they can proceed with the sale.
- The buyer may decide to withdraw from the purchase because of the defects identified and repairs needed.
- The seller may refuse to do the repairs and look for another buyer.
Bottom Line: FHA and VA or no, only conventional mortgages?
If the seller wants to sell their property “as-is”, an FHA buyer may not be an attractive option. As a seller, be aware of the unique risks of dealing with an FHA buyer.
This is not to say that all FHA buyers will withdraw from a sale if the property needs repairs. Sellers on a shorter timeline to sell (i.e., to buy another property or on a moving deadline) should consider avoiding an FHA offer due to the risks.