Buyers often assume their mortgage choice is locked in the moment a contract is signed.
In reality, loan programs can change during the transaction. What matters is whether that change alters the terms of the deal.
Switching from a conventional loan to an FHA loan is possible after a contract is in place, but only if specific conditions are met.
Understanding how this works can protect your transaction from unnecessary risk.
The Key Issue Is Timing
Once a contract specifies a loan type, changing that loan can raise legal concerns.
FHA financing is considered a more restrictive loan program than conventional financing. The FHA appraiser may insist on certain repairs being made by the Seller for the loan to be approved. Because of this, moving from conventional to FHA can be viewed as shifting to a “lesser” loan type.
That change becomes a problem if it causes any delay to the closing date or requires repairs by the Seller that were not contemplated when the contract was signed. While not agreeing to accept a buyer acknowledging that they will be seeking an FHA loan might be considered prejudicial, if there are offers that are otherwise equal, a Seller might consider an offer with a conventional loan to be a better offer than one that has an FHA loan intended.
A delayed closing caused by changing loan programs can be treated as a breach of contract. This is why timing becomes the primary factor in determining whether the change is acceptable.
If the switch to FHA does not change the scheduled closing date, and there are no repairs required to be addressed by the Seller, the conversion is typically permitted. If the buyer agrees to freeze the tax prorations and to compensate the Seller for any interest caused by a delay, then the Seller is in no worse position.
The FHA Amendatory Clause Requirement
FHA loans require an FHA Amendatory Clause to be signed by the seller.
This clause gives the buyer additional rights tied to the appraisal process.
Specifically, it acknowledges that if the property appraises for less than the agreed purchase price, the buyer has the right to cancel the contract.
Because this clause adds a new condition to the deal, sellers must agree to it before the FHA loan can proceed. This, too, can be the basis for denying the conversion, as the Seller is at greater risk for getting to closing merely because the appraised value is not fixed until the appraisal is conducted – often after the Amendatory Clause needs to be signed.
Why the Appraisal is Key
The appraisal becomes critical during a mid-contract loan conversion.
For the seller to comfortably sign the FHA Amendatory Clause, the appraisal should support the full contract price. If the appraisal comes in at value, there is minimal risk created by adding the FHA clause. If the appraisal comes in low, the seller faces a potential cancellation, which can complicate the transaction.
This is why confirming that the property is expected to appraise at value is an important part of deciding whether to proceed with an FHA loan after a contract has been signed.
Communicating the Change
Once you decide to move forward with an FHA loan and can meet the timing and appraisal requirements, or if Seller requirements can be met, your attorney should notify opposing counsel.
This communication confirms that while the loan product is changing, the closing date, purchase price, and core terms of the agreement will remain intact or will be modified to put the Seller in the same position they would be in if a conventional loan product was used. Keeping all parties aligned prevents misunderstandings and keeps the transaction on track.
The Bottom Line
Yes, you can convert a conventional loan to an FHA loan after your contract is signed, but only if the Seller agrees and the switch does not prejudice the Seller.
Before making the change, speak with your attorney and lender to confirm that all requirements can be met and that your transaction stays protected from unnecessary delays.
The Minchella & Associates Difference
With over 40 years of experience in Illinois real estate law, Erica Minchella has represented thousands of home sellers and buyers, landlords, and commercial and investment property owners.
For more information, schedule a consultation today.
