Is accepting an FHA or VA financing offer risky for a seller?

You have decided to sell your property, and your realtor sends you a listing agreement. Your realtor has asked you about what your listing price will be and the type of financing you are willing to accept.

If you have engaged an NC realtor to sell your property, they may use Form 101, Exclusive Right to Sell Listing Agreement which in paragraph 5, Listing Price, requires the seller to check which details the terms of payment they are willing to accept. The options are cash, FHA, VA, USDA, Conventional, Loan Assumption, Seller Financing, and any other type of financing.

Your realtor calls you with a full price offer and states the buyer will be utilizing FHA or VA financing. How do you determine whether there are any additional risks to accepting this financing? Firstly, let us talk a little bit about how FHA and VA loans work. 

FHA loans are insured by the U.S. Department of Housing and Urban Development (HUD) of which The Federal Housing Administration (FHA) is a part of. The US Department of Veteran Affairs insures VA loans. If your buyer is financing through FHA or VA, your offer will include an FHA/VA financing addendum (Form 2A4-T) which includes certain protections for the buyer. Let us discuss in detail.

FHA Financing

The FHA/VA financing addendum includes an amendatory clause for FHA financing that states that “the purchaser shall not be obligated to complete the purchase of the property described herein or to incur any penalty for forfeiture of earnest money deposits…setting forth the appraised value of not less than $xx”

What does this mean? If during the due diligence period, an appraisal is ordered and the value of the property is less than the agreed upon selling price, your buyer has the right to terminate the contract and a refund of his earnest money deposit (if paid). That is bad news for the seller who has taken their property off the market for x number of weeks and their buyer is able to walk away without any penalty. For clarity, if the FHA/VA buyer paid a due diligence fee it is not refundable for the reason of a low appraisal value.

VA Financing

In respect to a VA buyer, the addendum includes a “VA Notice to Buyer” which is quite like the FHA amendatory clause. The VA notice states that “the Buyer shall not incur any penalty by forfeiture of earnest money deposits or otherwise be obligated to complete the purchase of the Property described herein if the contract price or cost exceeds the reasonable value of the Property established by the Department of Veteran Affairs.” In addition, the buyer, if they so please, can opt to continue with the purchase despite the low appraisal value. However, the VA buyer will have to pay the difference in cash and cannot be from borrowed funds. So, not all bad news if your buyer really sees the value in purchasing the property.

Other VA requirements as per the addendum

Many sellers in Chapel Hill have a well and septic on their property. If you are one of those NC sellers and receive an offer from a buyer looking to obtain VA financing, the Department of Veteran Affairs (DVA) may or may not require well and septic inspections. In addition, a wood destroying insect inspection may also be required by the DVA. The not so good news for the seller is that they may be bound to pay for these inspections. Ouch.

My Tips on evaluating an offer with FHA/VA financing:

1.      Due Diligence Fees - Consider the costs that you would incur (if any) if you took your home off the market while your buyer conducts his due diligence. If you decide to negotiate a due diligence fee, it can assist in offsetting any costs should the buyer terminate the contract.

2.      Earnest Money Deposit – Negotiate a suitable amount of EMD that will function as liquidated damages should the buyer terminate the contract for a reason other than a low appraisal value.

3.      Closing Date – I think the shorter the closing date the better. A shorter closing date will afford you the time to fast track any potential appraisal issues so that you may return the property to market should the deal not go through.

4.      Purchase Price – Before listing your property, your realtor should have provided you with a comparative market analysis (CMA) that shows you the best listing range. If you are confident based on market analysis that you are priced right, you should not be as concerned that the property will not appraise. A side benefit of pricing the property appropriately is that you will have offers to select from.

5.      Repairs – The Form 2-T does not require a seller to make repairs to the property. I would stay clear from agreeing to make repairs should the buyer present you with an inspection report showing issues. If, as the seller, you agree to make repairs, this may represent an additional hurdle for you and the buyer to get over for closing.

6.      Seller-paid Inspection Costs – If your buyer is seeking a VA loan, you may be responsible for the costs to inspect any wells, septic, and wood destroying organisms. You should be aware of the costs for these inspections before accepting a VA buyer. Please note that paragraph 8 (i) of the contract requires the seller to insert a dollar amount limit should the DVA require such inspections performed at the seller’s expense.

If you have any questions about the FHA/VA addendum, please reach out to me at CJ@clairesells.com. If you have an attorney that will draft the contract and any addendum for you, unfortunately I do not have any training on attorney-drafted contracts and only the standard forms that have been provided to me by the North Carolina Bar Association and the NC Realtors.