Why are VA/FHA Loans not Accepted by Sellers

You keep hearing that your VA or FHA offer won't be accepted because sellers won't accept a VA or FHA loan and you're wondering why that is. For a while during the overheated market we’ve had in San Diego, it was very difficult to get VA/FHA offers accepted, but now they are starting to be accepted more easily We're covering why it’s difficult to get a VA or FHA offer accepted here in this video and what you can do about it.

What is a VA/FHA Loan?

VA is Veterans Administration and FHA is the Federal Housing Administration. The FHA is a true first time home buyer loan. A FHA loan is utilized if you’re purchasing a home for the first time in your life OR if you haven’t owned a home for at least 2 years. And FHA allows for just a s 3.5% down payment and it does carry mortgage insurance. The VA loan can be used multiple times depending on the situation. Both are excellent loan programs. The VA allows for 0% down, carries no mortgage insurance saving hundreds per month, and depending on your level of disability,can get the funding fee waived with the VA. Both are absolutely fantastic loan programs and if you're qualifying for one of those, then certainly it's a great option.

Primary Reasons Why VA or FHA offers May Not Get Accepted 

#1 - Strict Appraisal Requirements

The first reason is when having an appraisal done for FHA or VA, they tend to be more stringent on what they're looking for. They are really making sure that the home is in livable condition. The appraisers tend to be more strict because there are stricter guidelines for VA and FHA loans.

More repairs might be required when you are getting an appraisal done. There's a home inspection that's done which is paid for you by you, the buyer. A home inspector will go through and check everything and tell you what's wrong with the house or what's right with the house.

Then you have the appraisal. The home inspection and the appraisal are two  separate things. The home inspector is for your peace of mind, making sure you're buying a quality home. The appraisal is as ordered by the lender and it is paid for by you, the buyer. An appraisal is a third party's opinion of what the home's value is worth.

They are checking to make sure that the home is in livable condition. They're certainly making sure that there's flooring in place, for instance, sometimes with conventional loans, you don't actually have the flooring in place, but with the VA and FHA, you definitely do.

They're going to be looking for things that might have to be repaired. For example, if the door is broken, then the door needs to be fixed. If the paint is chipping on the home, then the paint needs to be repaired. In fact,that's actually a requirement, that any exposed bare wood has to be painted.

More things can come up during the appraisal inspection process that have to be taken care of. Unless this was actually negotiated upfront with the offer, it does not mean that the seller is obligated to fix those things. However, those items, if noted on the appraisal do have to be fixed before you close escrow. 

Either the seller has to pay for it, or the buyer has to pay for it. Oftentimes with VA and FHA loans, typically you don't have a whole lot of extra cash to come up with these things. The seller tends to get stuck, fixing those things. That is one reason why sellers might balk at accepting a VA or FHA offer when they're comparing it to a conventional offer or a cash offer.

#2 - Misunderstanding around Appraised Values 

The second reason is going to be related to the appraisal again. We just covered the appraisal and there is a VA/FHA Amendatory Clause that gets put into every contract. And basically it says "the VA and the FHA will not lend more than the appraisal value".

It's really no different than a typical lender, lender even on a conventional loan is not going to lend more than the appraised value, but there is a form that it gets stuck into the contracts that specifically says the VA and FHA will not lend over the appraised value. That really freaks out sellers.

In other words, if the home is $600,000, you offered $675,000 and the home appraises for $625,000 then potentially the home would have to sell for $625,000, unless you say you'd cover that difference $50,000. Then you're covering that difference. But sellers don't know that.  That's the big reason why they won't accept it. And they do not like to sign that. Even if you're signing an appraisal contingency waiver saying you will come out of pocket for the difference, they still don't like to sign. 

Who Pays for the Termite Clearance

And finally, the third reason comes back to inspections and repairs. And that is the termite clearance or Section 1 clearance. And that has to do with basically anything related to termites or dry rot and mold and fungus in wood.

There is language that makes it seem as if the seller has to pay for any section 1 clearance repairs, termite repairs, which can be costly. It could be  a few hundred dollars or it could be $8,000 - $10,000, depending on what's going on. Especially if you have to replace a lot of facia boards or doors or tent the whole home and fumigate. Sellers don't want to pay for that if they can avoid it, especially in a hot market..

This is a common misconception amongst most listing agents and a lot of sellers. Here's what is actually true, in a VA or FHA loan, a termite inspection has to be performed. It has to be performed and those repairs have to be done. If there's any section 1 termite work found, it has to be taken care of, but it does not have to be paid for by the seller. It can be paid for by the buyer.

It also can potentially if the deal's about to fall apart, agents can get involved and also credit funds back as well to help cover these things. Does not have to be paid by the seller now in a softer market, a more balanced market, typically those repairs will be asked for by the buyer upfront in the offer so that when they come up, then they're taken care of by the seller.

However, in hotter markets typically they're not asked for, and the buyer ends up paying for them or the negotiated as part of an overall inspection and repair negotiation. However, that's the big thing is that sellers think they're going to have to pay for it, but they don't technically have to. Those are just some clarifying things that are really misconceptions that sellers think they're going to be on the hook.

They think that they're going to have to come out of pocket for all kinds of repairs for appraisers that they call out that may not be termite related. They think they're going to have to pay for all the termite repairs. And they think that if the home goes over the list price and it appraises for less, that they have to sell the house for the appraised value. None of those things are actually true. They're just big misconceptions.

#4 - Seller Perception of Low Down Payment

And finally, the  4th reason why sellers don't like to accept cash offers and this is because these are low down payment loans at  0% and 3.5%, then they feel like you don't have a lot of cash to close the deal. And sellers like to see large down payments when buying a home.

As compared to conventional loans where the buyer is coming in with perhaps 20%-25% typically,  the sellers like to see that. They feel like if something comes up during the escrow process, then the buyer's in a better position to close on the loan. That sounds great in theory, and in some ways I like that as the listing agent too, however, I look primarily at the buyer's financial credibility.

I speak with the buyers lender when I'm the listing agent and I find out if the buyers are solid financially.Can they close the loan? At the end of the day, it's about, is that buyer qualified to close on the deal? If they're qualified to close and they're solid, and they have a good offer, then it's certainly worth considering and accepting.

It's all about for the seller ultimately getting the highest amount of purchase price for their home and closing on that loan as soon as the home is sold, it doesn't matter what happens. If that buyer ends up defaulting down the road because maybe they didn't have a lot of money, but that's another reason why sellers sometimes don't like to accept them off.

Those are all the reasons why sellers may not accept the VA or FHA offer.

Curtis Chism, Realtor
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info@sandiegohomes.io
Chism Team | DRE #02105113
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