Seller May Cancel Sale Due to FHA Mortgage Requirement

Added October 29, 2007 by Ilyce R. Glink

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Summary: When you buy a home with an FHA loan you have to follow their rules, including one where you can't close on a home if it was just sold 90 days earlier. If a seller is eager to sell he may not want to wait that long. Can the seller keep the buyer's deposit if the closing gets delayed or canceled?

Q: Can a seller cancel our purchase agreement? Our lender just informed us that FHA will not let us close on a house that closed escrow less than 90 days ago. That's when our seller bought the home.

We want to hold the closing date off 30 days to satisfy our FHA lender, but the seller wants to cancel the contract.

A: The Federal Housing Authority (FHA) is worried about people flipping homes for a lot more money when the value isn't really in the property. I understand where their rule is coming from, although if the property was in foreclosure four months ago, and your seller bought it, cleaned it up and is now flipping it, the value may be there.

A lot of times, scam artists buy homes, pretend to fix them up, and then sell them at ridiculously high prices to unsuspecting buyers who think they're getting a renovated home -- when they're not.

So, the FHA's rule is designed to protect you -- even if you don't want to be protected.

Meanwhile, whether your seller can cancel the deal depends on what your contract says. If you are obligated to show up for a closing on a particular date, and you can't close on the property, the seller may be entitled to cancel the deal -- and keep your deposit.

You should immediately sit down with a good real estate attorney who can feel out the seller and help negotiate either a delay of a month in the closing. Perhaps your attorney can negotiate an extension in time for you to get additional information to the lender for them to justify the valuation of the home. Or the attorney can assist you in the cancellation of the contract along with the return of your deposit.

By the way, I don't think this negotiation is something your broker should do. He or she might be able to, but you're getting into a sticky legal situation and I think it's best if you have proper legal representation. You need to make sure the contract terms are followed and that your notice of any right to cancel the transaction is sent timely and properly.

To find a good real estate attorney, ask your agent for a recommendation or call your local bar association.

Oct. 29, 2007.

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