When you’re buying a house, getting a mortgage pre-approval or pre-qualification letter is a big step forward. It means you can start looking for a house because the lender has checked out your finances and given you the preliminary go-ahead. However, this first approval isn’t final; your FHA loan could still fall through later during underwriting. So it’s important to know about the problems that could go wrong with the home loan.
How Often Do FHA Loans Fall Through?
Industry data suggests 10-15% of FHA loans get denied. According to the Consumer Financial Protection Bureau, the FHA denial rate was 12.4% in 2021 and 14% in 2020. Economic factors, policy changes, technology advancements, and shifts in borrower demographics and behaviors influence these percentages year-to-year.
FHA loans have more flexible qualifying guidelines than conventional mortgages regarding credit scores and down payments. But they still face higher denial rates compared to conventional loans. For example, the denial rate for conventional mortgages was around 10% in 2020.
7 Common Reasons FHA Loans Fall Through
While every home buyer’s situation is unique, these are among the most frequent causes for FHA mortgage denials:
1. Credit Score Below Requirements
FHA sets 580 as the minimum credit score for 35% down payment loans. Anything below could lead to denial, as it signifies higher risk Many lenders require scores of 600 or higher. Sudden score drops before closing, even after initial approval, could also cause denials.
2. Excessive Debt-to-Income Ratio
Your debt-to-income ratio is calculated by dividing your total monthly debt payments by your gross monthly income. This ratio should not be higher than 2043, which is the maximum ratio for FHA approval, or 2050 if there are compensating factors. A ratio that is too high, showing too much existing debt, can lead to denials.
3. Insufficient Cash Reserves
Beyond the down payment, you need cash for closing costs. FHA requires at least 3 months mortgage payments in reserves after closing. Low reserves indicate you may struggle to make payments, raising denial risks.
4. Unverifiable or Unstable Income
Lenders look at tax returns, pay stubs, and other papers to make sure that the borrower has a steady stream of income that they can use to pay back the mortgage. Denies can happen for irregular income sources that can’t be properly checked or don’t look like they will continue.
5. Property Condition Issues
FHA appraisals check both the home’s value and its physical condition. Problems with the structure, needed repairs, old electrical or plumbing, and other issues could lead to appraisals below the purchase price or failure to meet requirements, which would lead to denials.
6. Home Value Lower Than Purchase Price
Even if the property itself meets guidelines, the appraisal may still return a value below the agreed sales price. If the seller won’t renegotiate and the buyer lacks funds to cover the gap, it could sink the deal.
7. Attempting to Buy Ineligible Property Types
FHA loans are for primary residences you’ll live in most of the year. Trying to buy vacation homes or investment properties with FHA financing can prompt denials.
Tips to Prevent FHA Loan Fall Through
While you can’t fully control underwriting outcomes, you can take proactive steps to boost approval odds and avoid heartbreaking fall throughs:
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Monitor your credit – Review reports regularly and quickly fix errors. Pay all debts on time. Don’t apply for new credit before closing.
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Pay down debts – If your DTI ratio is close to the limit, paying down loans and credit cards can provide wiggle room.
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Save early and often – Down payments and closing costs can be 3-6% of purchase prices. Save as much as possible for these expenses.
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Stick with current employer – Keep your job stable throughout the process. Changing jobs or employers can raise red flags.
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Choose move-in ready homes – Opt for properties in solid condition requiring minimal repairs to avoid appraisal issues.
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Research value trends – Make offers in line with recent sales data in the neighborhood to prevent low appraisals.
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Avoid new debts – Hold off on large purchases that require financing until after closing.
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Work with reputable lenders – They’re more familiar with FHA requirements and can guide you accordingly.
What to Do If Your FHA Loan Falls Through
If your nightmare comes true and your FHA loan gets denied, stay calm and take these next steps:
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Request documentation – Ask for something in writing outlining the specific reasons for denial. This documentation can help you understand what went wrong and determine your next steps.
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Discuss with lender – Talk to your lender about whether the issues are fixable or not. For example, if the denial was solely due to a low appraisal, they may be able to get a second opinion.
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Provide clarification – If there are mistakes or misunderstandings within the reasons given for denial, supply clarifying documentation to the lender.
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Consider alternatives – Ask your lender if other loan programs may suit your current financial profile, such as adjustable rate mortgages or portfolio loans.
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Improve your financial position – If the problems can’t be quickly explained away, take time to improve your credit, save more, or pay down debts before reapplying.
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Talk to a real estate agent – Discuss options for moving forward with the purchase, such as negotiating with the seller or requesting your earnest money deposit back if entitled.
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Shop lenders again – If you feel your lender improperly handled your application or doesn’t offer solutions, don’t be afraid to explore other lenders.
Partner With a Knowledgeable Lender From the Start
While any FHA loan can fall through, skilled lenders know how to guide borrowers through the process to minimize denial risks. They can look out for red flags early and help you troubleshoot issues to get approved. If your loan does get denied, they have experience navigating next steps. Partnering with the right lender from day one makes a big difference.
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How Do FHA Loans Affect Sellers?
The largest concern sellers have with FHA loans is the appraisal/inspection process. FHA loans have the reputation of having strict requirements for appraisals and inspections. The FHA has what they call ‘Minimum Property Requirements,’ if a property doesn’t meet even one of them, financing falls through.
This is above and beyond what a typical appraisal does – determine the property’s market value. Most lenders use the appraisal to make sure the home’s value is there so that there’s enough collateral. The FHA takes it a step further to protect the buyer – they make sure the home is safe, sound, and sanitary and many sellers don’t like the nitpicking the FHA does on the property.
FHA loans also have the most lenient guidelines regarding closing costs. Many people mistakenly think sellers MUST pay FHA closing costs, but they don’t. While they can, it’s not a necessity. Many FHA borrowers, however, need it and will ask. Since the FHA allows sellers to contribute up to 6 percent of the loan amount, of course, buyers will ask for help.
Can A Seller Refuse An FHA Loan Offer?
A seller has the right to refuse any offer, including FHA offers. Sellers refuse offers for a variety of reasons including:
- The offer isn’t high enough
- The buyer wants too many contingencies
- The buyer isn’t putting enough money down on the home
- The buyer doesn’t have solid financing secured yet
- The seller doesn’t like the buyer’s financing options
What to do if your FHA end buyer’s financing is falling through
FAQ
Why do FHA loans fall through before closing?
One reason why FHA loans fail to close before closing is due to property issues identified during the appraisal process. Here’s what you should know about it. An FHA home appraisal is an evaluation of a residential property performed by a trained professional, with the goal of determining its market value.
Can a bedroom cause an FHA loan to fall through?
A bedroom lacking windows could cause an FHA loan to fall through. This issue cannot be easily fixed, like peeling paint or a missing handrail. So, the home appraisal is one of several things that could go wrong with an FHA loan before the closing.
What happens if you don’t get a FHA loan before closing?
Some lenders will run another credit check shortly before closing, to see if anything has changed. If bad new information shows up on your credit report before the closing, the FHA loan could be denied, even if you were already pre-approved. The best way to maintain a good credit score is by paying all of your debts on time.
Do you have to move into an FHA Property?
No. FHA loans are for owner-occupied property only. You have to move in within 60 days of closing on the deal, and you have to live there for at least a year. After that, you can change how you use the property. 9. How do I get an FHA loan? Your credit score doesn’t have to be greater than 580.
How long does a FHA loan take to close?
Securing an FHA loan is a solid option for homebuyers who need a lower down payment or have less-than-perfect credit. However, the time it takes to close can vary based on lender efficiency, required documentation, and property-related steps.
What is an FHA loan?
An FHA loan is a mortgage loan that is insured by the Federal Housing Administration (FHA). Find answers to the most common questions about this type of home loan. Below are answers to the most common questions about home loans backed by the Federal Housing Administration, also referred to as FHA Loans. 1.
How often do FHA loans fall through?
What is the downfall of an FHA loan?
FHA Loan: Cons
The MIP must either be paid in cash when you get the loan or rolled into the life of the loan. Home price qualifying maximums are set by FHA. Interest rates are higher than with conventional loans (based on relaxed borrower eligibility requirements)
How much do I need to make to buy a $300K house with an FHA loan?
To buy a $300K house, you’ll generally need to earn a household income around $80,000 per year, assuming 20% down, a 6.5% interest rate, and moderate existing debts.
Why would a house not pass FHA financing?
Health and safety concerns: Properties with potential health and safety hazards, such as lead-based paint, asbestos, or mold, may not qualify for an FHA loan.