When using an FHA loan, can you make an offer above the seller’s asking price?
Sure. There’s nothing within the official FHA guidelines that prevents you from making a purchase offer over the list list price. But you could run into problems down the road, when the home gets appraised. And you might end up paying more out-of-pocket than you originally intended.
In 2021, seems that a lot of home buyers in the U.S. are making offers above the asking price. In fact, I just read an April 2021 report from the California Association of Realtors that showed two-thirds of home buyers in that state offered more than the list price.
But what about using an FHA loan to buy a house? Can you make an offer for more than the seller’s asking price, when using the FHA mortgage program?
The short answer is yes. There is nothing preventing you from offering more than the list price when using an FHA loan to buy a house. But it could present problems later on in the mortgage process. Specifically, you might find yourself in a situation where the home appraises for less than the purchase price.
Offers Above the Asking Price With an FHA Loan
In a highly competitive real estate market, it’s fairly common for home buyers to offer more than the seller’s asking price. This usually occurs in a bidding war type of scenario, where home buyers make bigger and bigger offers in order to outmaneuver one another.
This kind of scenario happens a lot in a classic seller’s market, where the number of buyers actively seeking properties greatly exceeds the homes currently on the market.
You might think of it as a “preemptive strike.” It works like this. Home buyers find a property they wish to purchase and make an offer. But they realize they are in a highly competitive market, with other buyers competing for that same property. So they might offer more than seller’s asking to rise above the competition.
The downside to this strategy is that you might end up paying more for a house than it’s currently worth. And if home prices decline going forward, you could end up in a negative equity situation. In other words, you could become “upside down” in the mortgage loan.
But if prices keep rising, this wouldn’t be an issue. So there are some market-related risks to consider.
While this is a common strategy, there are some concerns when it comes to FHA loans. Making an offer above the asking price could be problematic later on, when the lender has the home appraised.
How the Home Appraisal Ties Into This
Any home being purchased with an FHA loan has to be appraised by a HUD-approved appraiser. The appraiser is primarily concerned with two things:
- First, he will review the home to make sure it meets the minimum property requirements for the FHA loan program.
- He will also determine the current market value of home, based on recent sale data and other factors.
And here’s where it becomes tricky making an FHA purchase offer above the asking price. If the appraiser determines that the home is worth less than what you’ve agreed to pay, you might have trouble with your financing.
Remember, FHA loans are typically limited to a loan-to-value (LTV) ratio of 96.5%. That means the amount you borrow from the lender cannot exceed 96.5% of the appraised market value of the home. As it states in HUD Handbook 4000.1: “For purchase transactions, the maximum LTV is 96.5 percent of the Adjusted Value.”
If you offer more than the market value when using an FHA loan, you might have to come up with the difference out of your own pocket. And that might be more than you’re willing or able to pay.
Here’s a Realistic Example Scenario
This will make a lot more sense with an actual example. Here’s a realistic scenario that illustrates the potential problems of using an FHA loan and making an offer above the asking price:
- Let’s say you find a house you want to buy that is priced at $300,000.
- It’s a highly competitive market, so you decide to offer $320,000.
- Your mortgage lender has the home appraised in accordance with FHA guidelines.
- The appraiser determines the home is worth $307,000 in the current market.
- FHA loans are limited to 96.5% of the appraised value — $294,720 in the scenario.
- Your loan amount would end up being $25,280 less than the amount offered.
The FHA only requires you to make a down payment of 3.5%. When applied to the $307,000 appraised value above, that would equal a down payment of $10,745. But by offering an amount that was higher than the asking price, the home buyer in this scenario would end up with a much bigger down payment. They would probably have to pay that $25,280 difference out of their own pocket, due to the LTV rules for FHA loans.
The point is you have to consider how your offer will affect you later on, in terms of your down payment and out-of-pocket expense.
Bottom line: There is no official rule or requirement that says you can’t make an FHA purchase offer for more than the seller’s asking price. But it could lead to a situation where the home appraises for an amount significantly less than what you’ve offered to pay. And in such cases, it’s the buyer who has to come up with the difference, in the form of a larger down payment.