Last Updated on November 4, 2020 by Luke Feldbrugge
Many first-time home buyers use FHA loans because of the significant benefits they provide. But there are some unique considerations you have to keep in mind, particularly when it comes to actually writing an offer. Here’s a quick introduction to FHA loans as well as some tips on how to submit a winning offer using one of these loans.
What is an FHA Loan?
FHA stands for Federal Housing Authority. FHA loans are backed by this federal department and are guaranteed by the government, meaning there is less risk for sellers and financing partners.
If you have a credit score between 500-579, you may be able to secure a loan as long as you can put 10% down. Likewise, if you have a credit score of 580 or higher, you may be able to put as little as 3.5% down. That makes it a lot easier for many people to achieve their dream of home ownership.
There are also some requirements that buyers need to be aware of as they can impact your budget and how much house you can afford. For example, there is an upfront funding fee of 2.25% of the total loan that has to be paid at closing. Also, all FHA loans include mortgage insurance premiums if you put down less than 20%, which is an additional cost you’ll pay either upfront at closing or the cost will be calculated annually and you’ll pay monthly.
Why Do Some Sellers Dislike FHA Loans?
Using an FHA loan to buy a home can sometimes work against you. It’s very unfortunate because this aversion comes almost entirely from misguided notions about FHA loan requirements. In the past, sellers were required in some cases to cover the closing costs of buyers. This obviously would be a big negative for sellers hoping to profit as much as possible from their home sale and could be a big reason why they avoid FHA loans. But this is no longer the case as the FHA permits home buyers to cover all of their own closing costs, meaning there’s no disincentive for sellers to choose an FHA offer.
Another hang-up for sellers can be that the appraisal process can be more strenuous because the government is backing the loan and wants to ensure the value of the property measures up the loan. For sellers who want to sell quickly and easily (which is most of them), this can be another downside.
Old habits are hard to break, as they say, and myths and misgivings about FHA loan requirements persist, putting buyers who use these loans at a disadvantage. So, it will be up to you to write an offer strong enough that sellers leave their misplaced notions in the past where they belong.
Writing a Winning Offer
Here are five ways you can strengthen your offer using an FHA loan and get the home of your dreams:
- Offer to pay all of your own closing costs – Writing this into the offer will help fight the stigma against this loan type and give the seller assurance they won’t be adding any extra costs.
- Put more money down – This runs counter to one of the major benefits of this type of loan, but it can help strengthen your offer, so you should at least consider it if you can afford to financially.
- Put more earnest money down – Earnest money shows sellers that your offer is serious, and increasing the amount you put down can give them increased confidence in your offer.
- Write a personal letter – Telling your story and explaining how, as a first-time home buyer, purchasing this particular home could change your life can make the difference and compel a seller to choose you over another buyer.
- Offer a fair price based on nearby comps – This strategy isn’t unique to FHA loans, but having an FHA and submitting a lowball offer may be too much for the seller and force them to choose a different buyer.
In hot real estate markets where homes will have multiple interested buyers, you need to do everything you can to make your offer stand out above the rest. It is possible to use an FHA loan and still beat out the competition. By understanding the particular issues associated with FHA loans and following these tips, you can write a strong offer and buy the home of your dreams.
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