5 Reasons Why FHA Loans Get Turned Down - Coast2Coast Lending (2024)

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5 Reasons Why FHA Loans Get Turned Down - Coast2Coast Lending? ›

Despite the lenient FHA loan requirements, it is possible to be denied. The three primary factors that can disqualify you from getting an FHA loan are a high debt-to-income ratio, poor credit, or lack of funds to cover the required down payment, monthly mortgage payments or closing costs.

Despite the lenient FHA loan requirements, it is possible to be denied. The three primary factors that can disqualify you from getting an FHA loan are a high debt-to-income ratio, poor credit, or lack of funds to cover the required down payment, monthly mortgage payments or closing costs.

Some sellers may be hesitant to accept an FHA offer due to the perception that FHA loans take longer to close or have stricter property requirements; having professionals with experience navigating the process can move things along effectively and dispel any of those common FHA myths or other questions that come up for ...

FHA Underwriting Worries Some Sellers

One reason a seller might refuse your FHA-backed offer is that they believe the home sale may be more likely to fall through due to the FHA loan program's more lenient underwriting requirements.

The FHA's three requirements are that a property must be safe, secure, and structurally sound to qualify for one of their loans. Properties cannot have adverse conditions that might imperil the homeowner, and must meet proper building codes. As a buyer, these standards protect you from buying an unsafe property.

Common issues appraisers look for in the exterior are damaged roofs, cracks in foundations and anything blocking access to the property. When it comes to the interior, they look for basic things like missing handrails or chipped and peeling paint that could indicate a lead hazard.

While FHA loans can be much more forgiving compared to other types of loans one of the reasons an FHA application is declined is due to high debt-to-income ratios. Most lenders ask the total amount of monthly credit obligations, including the mortgage, should be no higher than 43 percent of gross monthly income.

The report also shows that the denial rate of Federal Housing Administration (FHA) loan applications differed from the overall average, at 12.4% in 2021.

Here's how it breaks down. Federal Housing Administration loans: 14.4% denial rate. Jumbo loans: 17.8% denial rate. Conventional conforming loans: 7.6% denial rate.

The overall structure of the property must be in good enough condition to keep its occupants safe. This means severe structural damage, leakage, dampness, decay or termite damage can cause the property to fail inspection. In such a case, repairs must be made in order for the FHA loan to move forward.

Why do people not like FHA loans? ›

The other major reason sellers don't like FHA loans is that the guidelines require appraisers to look for certain defects that could pose habitability concerns or health, safety, or security risks. If any defects are found, the seller must repair them prior to the sale.

Major structural issues that are common FHA red flags include cracked or crumbling foundations, deteriorating roofs, and water damage. Other red flags that appraisers look for include: Missing handrails. Cracked windows.

As a seller, you're usually not taking on additional risk by accepting an offer from a buyer pre-approved for an FHA loan than you would with a buyer pre-approved for a conventional loan. In fact, it's even possible for an FHA loan-backed offer to be the best offer in a multiple offer situation.

Reasons for an FHA Rejection

There are three popular reasons – bad credit, high debt-to-income ratio, and overall insufficient money to cover the down payment and closing costs of a home.

An underwriter may deny a loan simply because they don't have enough information for an approval. A well-written letter of explanation may clarify gaps in employment, explain a debt that's paid by someone else or help the underwriter understand a large cash deposit in your account.

Putting down 20 percent – This is the simplest way to avoid FHA mortgage insurance — but if you have the savings to put down 20 percent, it might make more sense to work on your credit score to qualify for a conventional loan instead.

Reasons for an FHA Rejection

There are three popular reasons – bad credit, high debt-to-income ratio, and overall insufficient money to cover the down payment and closing costs of a home.