Reader question: “We are using an FHA loan to buy a house, and I have some questions about the offer process. Is it any different when using this type of mortgage program? How do we make an FHA offer to purchase a home? Lastly, how do we decide a fair amount? Do we just take a certain percentage off the asking price?”
You should base your FHA purchase offer on current property values, not the asking price. So the first thing you need to do is find out what the house is worth in the current market.
The seller’s asking price might be realistic, or it might be completely inflated. You’ll likely see some of both during your house hunting process. The only way to know for sure is to review recent comparable sales in the area.
Building Your FHA Offer Around Comps
For example, if you’re looking at a two-story home with 2,400 square feet located in the Pleasant Valley subdivision, you should find out what other two-story homes of similar size in Pleasant Valley have sold for in recent weeks. This is what real estate agents refer to as “comps,” which is short for comparable sales.
The more recent the sales data, and the more similar the comps are, the more accurately you can determine a fair market value. This is one of the things a real estate agent would do for you — they would help you evaluate the seller’s asking price. In fact, when most agents submit their clients’ FHA offer on a house, they attach the comps as well. It’s a way of saying, “We have done our research with regard to pricing, and here is the data that supports our offer.”
Of course, if you don’t have an agent, you’ll have to handle this for yourself. These days, there are a lot of websites online that offer this kind of data. Do a Google search for “find house values” and you’ll see what I mean.
When making an FHA offer to purchase a home, you must also consider upgrades and improvements. This is something of a gray area. Some upgrades (such as kitchens and baths) contribute more toward the resale value than other types of upgrades.
Using an Agent vs. Handling it for Yourself
If you are using a real estate agent, consult with him or her on the matter. Making an offer on a home is one of the key areas where an agent can help you. An experienced real estate professional will have been “down this road” dozens of times before.
If you’re not using an agent, you’ll have to do the research yourself. The asking price for the home should be determined by the recent comparable sales in the area. Your real estate professional will pull recent sales in the neighborhood and/or nearby similar neighborhoods to determine the fair market value of the home you would like to buy.
If you are buying on your own, without the help of an agent, you will have to find some way to look at comparable sales in the area. Fortunately, the internet makes this process much easier. Use websites like Realtor.com, Zillow and Trulia to find out what homes are selling for in this area. This will help you shape your FHA purchase offer.
Dealing With Counter Offers from the Seller
When you make an FHA offer to buy a house, you also have to be prepared for counter offers from the seller. This is when the seller rejects part of the initial offer, but wants to keep the negotiations open to reach middle ground.
The important thing to understand is that the counter is a common part of the home buying process. It’s a normal part of negotiations. So don’t take it personally. Counter offers are not meant to insult the buyer, and they are not necessarily a dead end. They simply represent the desires and expectations of the seller, which are often different from those of the buyer.
This is another area where a real estate agent can help you. Experienced agents know how to handle these situations in a way that increases the likelihood of a deal. Be sure to have a plan in place for counters. Know how you’ll respond to it, and what your maximum offer amount will be. That way you can respond quickly and confidently.
Do Sellers Prefer Conventional Loans Over FHA?
There may be situations where an FHA purchase offer works against you. This is sometimes the case in multiple-offer scenarios. If a seller receives equal offers from buyers with conventional mortgages, he or she might choose those over an FHA borrower.
There’s an outdated stigma that still lingers in the real estate world, with regard to the Federal Housing Administration’s loan program. In the past, sellers were sometimes required to pay some of the buyers’ closing costs when an FHA loan was used. But that’s not necessarily the case today. The FHA allows home buyers to cover almost all of their own closing costs these days. Granted, the buyer can still request the seller to cover those costs. But it’s not required.
Additionally, the home appraisal requirements for FHA can be more rigorous than those for conventional loans. For these reasons, sellers have been known to shy away from borrowers with FHA home loans.
Of course, a lot of this has to do with the type of real estate market you’re in. If you are in a slow market with relatively few buyers and plenty of homes listed for sale, the seller probably won’t care what kind of mortgage you have — as long as you’ve been approved for the loan. But if you’re in a more active real estate market, where multiple offers are common, an FHA offer could be a possible disadvantage.
The bottom line is that you should use whatever type of loan works best for you, as a borrower. If a particular homeowner has a problem with your financing method, find another house to buy. If you’re a qualified buyer with a pre-approval letter in hand, you’ll eventually find a seller who is thrilled to accept your offer.