“My offer on a home was rejected because I will be getting an FHA loan. Is this legal? Isn’t that some kind of discrimination?”
The truth is, a seller can opt not to accept an offer with FHA or VA financing—and many do, for reasons that may seem valid, but really aren’t. It’s not illegal, but it’s not necessarily smart on the seller’s part.
Some home purchase offers are rejected for the wrong reasons
If there are two nearly identical offers on a property, but one has 25% down and the other has 10% down, the one with the larger down payment will almost always prevail, even though the seller will net the same proceeds regardless of the down payment.
The (faulty) reasoning behind this is the belief that mortgages are insanely difficult to get, and that a borrower with a larger down payment is more likely to be approved and close escrow. The fact is that from a loan approval standpoint, there is no difference between the large down payment and the smaller one.
A borrower who has been preapproved using one of the two prevalent Automated Underwriting Systems (Fannie Mae’s Desktop Underwriter or Freddie Mac’s Loan Prospector) will in all likelihood get a final loan approval, provided that the data input by the loan officer was accurately presented. The function of the lender’s underwriter is typically to verify that the data input into the system (income, assets, job history, etc.) jibes with the documents in the file. There is very little human judgment in the loan decision process.
FHA and VA loans are actually easier to approve than conventional loans. Both loans have lower credit score requirements (580 compared to conventional’s 620), higher allowable debt-to-income requirements (50% for FHA compared to 45% for conventional) and plenty of room for different individual situations that could be show-stoppers for conventional loans.
Many people believe—incorrectly—that FHA and VA loans require all manner of repairs and inspections. While an appraiser doing an FHA or VA appraisal is required to add “health and safety” issues to the report, they are the same kinds of items that any buyer would want to have remedied for any type of purchase.
If the appraiser notes obvious termite infestation or other wood destroying organisms, he will note it on the appraisal report. As a matter of common sense and prudence, any buyer, regardless of financing, should get some form of home inspection report and possibly termite and roof reports as well. Even a buyer making a large down payment will typically ask for repairs or price concessions where defects are found.
You can help prevent an offer being rejected before it happens
We encourage buyers to be proactive, not reactive. Once an offer has been rejected by the seller, there are far fewer ways for the buyer to salvage that particular home option.
Any buyer making an offer on a property should provide a solid preapproval letter to assure the seller that they are well qualified and have begun the loan process. A diligent listing agent (seller’s representative) will also have a conversation with the buyer’s loan officer to confirm that the buyer has actually been preapproved, not just “prequalified.” The latter is nothing more than a loan officer’s opinion that the prospective buyer probably can get financing. The former involves reviewing all the buyer’s documentation and application and getting at least an automated approval.
If you’re a buyer who will depend on VA or FHA financing, you can take a few actions that may tip the scales in your favor:
- Get a solid preapproval letter from your lender. This goes without saying. It tells the seller that you have already jumped through most of the hoops for loan approval.
- If possible, get a “TBD approval.” This means that your loan has been approved by the underwriter (not just the automated system) even though the specific property is To Be Determined. With a TBD approval, the seller will know that you have already taken most of the steps needed to get your financing completed—and the process will also happen much more quickly.
- Consider writing a personal letter to the seller. Buying or selling a home is one of the most emotional experiences in our lives. If you write a heartfelt letter to the seller, telling them how much you love their home and how much you look forward to making it a home for your family, it will actually create a relationship with the seller. Does this work every time? No; but we have seen many instances where sellers have decided to accept offers from people because they liked them, based on the appeal of their personal letter.