Selling your home to an FHA buyer can be trickier than selling to someone with a non-government-backed mortgage. The Federal Housing Authority sets certain requirements that must be met before they approve the loan.
For sellers, these FHA loan requirements may mean your home needs repairs before it can be sold to an FHA buyer. While these repair are usually not too expensive, they can cause delays because the home has to be up to FHA standards before closing.
It’s also important to note that some areas have more FHA buyers than others. It can be difficult to tell what the buyers shopping in your neighborhood are offering, so we recommend going with a good realtor who can advise you on what to expect.
To find a great realtor, we recommend our partners at Clever Real Estate because they can save you thousands in closing costs. Most realtors charge 2.5-3% for their listing fee, but we think that’s too high. Clever pre-negotiates low rates with top, local realtors and passes the savings on to you — with Clever, you can sell your home for 1.5% or $3,000 for home sales below $350,000.
Clever recruits top realtors from companies like Keller Williams and Coldwell Banker. And best of all, it’s 100% free. Clever will match you with up to three local realtors, totally free. Pick the one who knows the most about your neighborhood and you can save thousands on your home sale.
What Do FHA Loans Mean for Sellers?
An FHA loan is a mortgage that’s insured by the Federal Housing Administration. Borrowers who take out an FHA loan pay for mortgage insurance, which is in place to protect their lender from a loss if the borrower defaults on a loan.
Since the loan is insured, FHA approved lenders offer attractive interest rates and more flexible borrower requirements. These loans are available to borrowers with less than stellar credit and have lower down payment requirements.
Much like government-funded student loans, FHA loans have built-in protections for buyers facing financial hardship. This includes forbearance, loan modifications, and payment deferrals.
What Are FHA Loan Requirements for Home Sellers?
Homes that qualify for an FHA loan must meet HUD’s “minimum property requirements.” Qualifying houses must:
- Have a roof that will last at least three years, a maximum of three roofing layers, and will adequately keep moisture out
- Be safe and structurally sound
- Have no exposed wires or damaged wiring
- Have adequate heating in all inhabitable rooms (there are exceptions for areas with mild winters)
- Be free of termites or wood-destroying organisms (a termite letter may be required)
- Have proper safety hazards, like handrails
- Have no underground storage tanks (i.e. oil tanks)
How Much Are FHA Closing Costs?
FHA closing costs for sellers vary, but they generally amount to 8-10% of the sale. Here’s how that breaks down:
- 6% in realtor fees
- 1% in transfer and recording fees
- Up to 0.5% for title insurance fees
- $1,300 to $4,500 in escrow and attorney fees (if applicable)
FHA Loan Regulations for Sellers: The 6% Rule
In an FHA loan, the seller may offer to pay closing costs – including appraisal, credit report or title expenses – for the buyer in any amount. However, the dollar can not exceed 6% of the sale price.
If those concessions exceed 6%, it is considered an “inducement to purchase,” and the FHA will lower the amount of the mortgage, dollar by dollar, for the amount contributed over 6%. It also means the seller will probably have to drop the price of the home.
An additional stipulation is the 6% contribution maximum must cover actual closing costs, discount points, or interest rate buy-downs. For example, if closing and other costs total $5,000, the seller can’t offer to pay $8,000 in closing costs.
Normally this shouldn’t be a problem, but if there are a lot of repairs to be made, then you’ll want to talk with your realtor about whether or not you should go through with the sale.
If you need expert help but don’t want to spend the traditional 2.5-3% realtor listing fee, we recommend our friends at Clever Real Estate. Clever is a nationwide low commission brokerage that can help sell your home for just 1.5%, or $3,000 for home sales below $350,000.
With Clever, you can find a great local realtor who can advise you on your next home sale. If it becomes cost prohibitive to sell to an FHA buyer, that’s something you should know upfront, as it can alter your marketing direction – and if you can find a non-FHA buyer, you may not to make as many repairs.
Let Clever help you find a top local realtor. Fill out the form below to get started!
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FHA Loan Fees: Who Pays What
There are a number of FHA loan fees buyers need to consider to before committing to this type of loan. Sellers generally just have to worry about repair costs, but concessions can be made for some buyer closing costs as well.
Loan Origination Fee: Buyer Pays
This is the fee a mortgage lender charges to cover their administrative costs (application processing and closing document preparation). An employee or independent broker manages the details, and the fee covers the cost of labor. It’s paid the the borrower and is not exclusive to an FHA loan.
With certain FHA loans, like reverse mortgages and rehab loans, regulations require that the origination fee be 1% or less than the principal amount borrowed. That means if you were to borrow $200,000 – your loan origination fee would be $2,000 or less. However, with the most common type of FHA loan, lenders are required to follow the Real Estate Settlement Procedures Act, aka RESPA. This act states that origination fees must be reasonable based on what other lenders in the same area are charging.
Upfront & Annual Mortgage Insurance Premiums: Buyer Pays
Two mortgage insurance premiums (MIP) are required on all FHA loans: the upfront mortgage premium and the annual mortgage insurance premium.
- The upfront mortgage insurance premium (UFMIP) is equal to 1.75% of the total loan amount, which equates to $1,750 on a $100,000 loan. This is paid when the borrower gets the loan and it can be rolled into the loan cost.
- The annual insurance premium (MIP) is paid monthly, similar to car or homeowner’s insurance plans.
With other loans, MIP is cancelled when homeowners earn 20% equity. That’s not true with FHA loans. With FHA loans, buyers who put down less than 10% will have to may MIP throughout the entire life of the loan. The only way out is to refinance.
FHA 203(k) Loan: Buyer Pays (Optional)
If you need money to pay for home renovations, you can take out an option 203(k) loan. This loan allows you to finance up to $35,000 to make home repairs, such as painting or replacing cabinets. It does not allow you to make structural changes to your home.
One of the biggest benefits of a 203(k) loan is the loan amount is based on the projected value of the property after repairs, not the current market value of the home.
Additional Seller Closing Costs
In addition to contributing to buyer closing costs, which is optional, sellers also have fees of their own to pay and a variety of other fees, which are explained here.
Essentially, closing costs vary on the buyer and the type of home. But the biggest single, avoidable cost is the seller’s realtor fee. Traditional realtors charge 2.5-3%, which is a significant amount of cash. At 3%, a home sale of $350,000 would cost you $10,500 in listing fees.
That’s why we recommend Clever Real Estate. Clever can match you with top-performing, local realtors who can help sell your home for 1.5% or $3,000 for home sales below $350,000.
With Clever, you’ll get the exact same experience of a traditionally realtor for a fraction of the price. Clever’s local agents are pre-vetted and hand-picked, and you can match with up to three realtors to choose from. And best of all, Clever is 100% free to use. Fill out the form below to get connected with great local realtors who can help sell your home for top dollar and save you money on commission. Clever’s realtors have experience with FHA sellers, so they can help guide you on what you should (and shouldn’t) fix before listing your home.
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