If you’re preparing your home for sale, you are surely focused on making it as attractive as possible to potential buyers. Making small repairs, removing clutter, and cleaning – both inside and out – are very important steps to take. However, in addition to staging your home for buyers, you also want to make your house attractive to the Federal Housing Administration (FHA).
The majority of buyers who acquire an FHA mortgage loan choose one because they require a small down payment, while offering low interest rates, attractive terms, and lower monthly payments relative to conventional mortgages. In fact, FHA mortgages are especially attractive to first-time home buyers because the FHA only requires a 3.5% down payment. Because FHA mortgages are so popular, it behooves you as a seller to learn what you can do to help your home be one that the FHA is willing to finance.
What Is the FHA?
The FHA is a part of the U.S. Department of Housing and Urban Development (HUD). The premise of HUD, and in turn FHA, is to make homeownership available and affordable for everyone. To accomplish this, the FHA insures mortgages so that lenders don’t carry all the risk when extending credit to buyers. As a result, lenders are more willing to offer financing to a wider range of buyers, which means consumers have more opportunities to become homeowners. As a seller, this means more potential buyers for your house.
When your home is FHA-friendly, you open up the door to more potential buyers. Approximately 30% of the mortgages buyers use to finance a purchase are backed by the FHA – meaning that if your home does not meet FHA requirements, you automatically cut yourself off from 30% of potential home buyers.
Steps to Make a Home FHA-Friendly
The best way to ensure that potential home buyers can use an FHA mortgage to finance the purchase of your home is to understand what the FHA requires.
1. Set the Price Appropriately
The FHA limits how large of a mortgage it will guarantee, though the maximum limit can change from year to year and can vary between cities. In general, the maximum mortgage amount is approximately $271,000. However, in areas of the country where home prices are significantly higher, such as San Francisco, the FHA sets the maximum mortgage amount at slightly over $729,000.
The limits the FHA sets regard the mortgage amount. In other words, it’s the amount that can be financed after the 3.5% down payment the buyer has to pay out-of-pocket. If the market value of your home falls within the pricing guideline for your area, then you’re already ahead of the game.
2. Prepare the Home for Inspection
Home inspectors evaluate the condition of your home to ensure that it meets safety, health, and building laws. Home inspections are not the same as appraisals, however. So just because the home appraises for a specific market value does not mean that it can pass inspection.
You can help your home pass inspection by making needed repairs to ensure that everything works properly. The roof, air conditioning, heating, toilets, showers, and bathtubs are some of the primary items FHA requires to be in working order. You can even pay for your own home inspection to highlight necessary repairs. This also gives you time to make repairs before the buyer schedules the official home inspection.
3. Offer to Help Pay Closing Costs
Especially in a buyer’s market, in which your home is one of a multitude of others on the market, you can make your home stand apart from the crowd by offering to pay for some of the buyer’s closing costs. The FHA permits the seller to pay up to 6% of the total closing costs on the buyer’s behalf. Since many first-time buyers use FHA mortgages, offering to help with these costs can help you sell your home faster and easier.
Properties Not Eligible for FHA
1. Homes With Encroachment Issues
If the property has a garage, shed, utility easement, dwelling, or other type of physical structure that is owned by a neighbor or a third party, but breaches the property of the homeowner, then it is not eligible for an FHA loan.
2. Unfinished Homes
The home has to have or be able to obtain a certificate of occupancy, which is a certification by the county inspector saying the home is habitable. A habitable home has finished walls, covered floors (not exposed cement), working faucets in the kitchen and bathrooms, flushing toilets, and hot water. No gaping holes in the roof or walls, or any other factor that makes the home uninhabitable, are permitted for FHA financing.
3. Investment & Rental Properties
The FHA only finances owner-occupied homes and vacation homes. If you currently have a rental unit on your property, there’s a good chance it won’t qualify for FHA financing.
Making your home attractive to buyers can increase the number of people who view your home, and, ideally, the number of offers you receive. Ultimately, it can help lead to a simple, profitable sale. However, additionally positioning your home to shine when viewed by the FHA can ensure that your hard work isn’t wasted and that you get the best possible price.
Does your home meet FHA requirements? What can you do to make your home more FHA-friendly?