FHA vs Conventional: Which is better for sellers?
Rob Miller explains why sellers often prefer conventional loans over FHA loans, and how to negotiate effectively as a buyer using FHA.
Rob Miller, Branch Manager at MadCity Home Loans, answers one of the most common questions we get from our Realtor partners.
FHA vs Conventional: Which is better for sellers?
When a listing agent reviews multiple offers, they will almost always advise their seller to accept a Conventional loan over an FHA loan, even if the FHA offer is slightly higher. Here is why sellers prefer Conventional financing, and what you can do about it.
1. The FHA Appraisal Standards
Conventional appraisals are primarily concerned with the value of the home. FHA appraisals are concerned with the value and the safety/habitability of the home.
If a house has peeling paint on the garage (a lead paint hazard on older homes), no handrails on the basement stairs, or a missing GFI outlet near the sink, an FHA appraiser will flag it. The loan cannot close until those repairs are made and re-inspected. Sellers do not want to be forced to do repairs two weeks before closing, so they avoid FHA offers.
2. The FHA Appraisal Stays with the Property
If an FHA appraisal comes in lower than the purchase price, that low appraised value is "attached" to the property for the next 120 days. If the current deal falls apart, the seller is stuck with that lower value if the next buyer also uses an FHA loan. Conventional appraisals do not stick to the property.
How to Win with an FHA Offer
If your buyer must use an FHA loan, you can still win. Our strategy is simple: Call the listing agent.
I personally call the listing agent on every offer my buyers submit. If they are using an FHA loan, I assure the listing agent that the buyer is rock-solid, fully pre-approved, and that we have already reviewed the property condition report and see no obvious FHA red flags. Proactive communication from a local, trusted lender is the #1 way to get an FHA offer accepted over a Conventional one.
Related Guide: Read our deep dive on Conventional Loans to see the exact credit requirements.
Deep Dive: FHA Loan Questions
These Q&A posts cover common questions we hear from buyers utilizing FHA financing.