Loans insured by the Federal Housing Administration, better known as FHA loans, are attractive to buyers. That's mainly because they require down payments of just 3.5 percent of a home's purchase price for borrowers with FICO credit scores of 580 or higher. But will applying for an FHA loan hurt your chances of landing your dream home?

Maybe.

Some sellers still look at FHA loans negatively, viewing them as loans of last resort for borrowers with weak credit. They worry that FHA deals are less likely to close because of this. Other sellers believe that FHA home inspections are too stringent, and that they'll need to spend thousands of dollars on repairs that they could avoid if they work instead with a borrower taking out a conventional loan that isn't insured by the federal government.

This begs the question: Should borrowers avoid FHA loans?

Mortgage lenders say no, if an FHA loan is a good fit for you. It's easier to qualify for an FHA loan if your credit is less than perfect. The lower down payment requirements are also important if you don't have a lot of money saved for a down payment.

But lenders do warn that you might run into sellers who have a negative impression of FHA loans. The good news? There are plenty of sellers who are happy to work with any borrowers, as long as they can qualify for a mortgage.

A financial drawback

Randall Yates, founder and president of Dallas-based The Lenders Network, said that mortgage insurance payments are the biggest drawback of FHA loans.

Mortgage insurance protects your lender, not you, in case you stop making payments. With conventional mortgage loans, you can drop mortgage insurance after building up enough home equity or if you come up with a down payment of 20 percent or more of your home's purchase price. FHA loans, though, require an upfront private mortgage insurance fee of 1.75 percent of your home's purchase price no matter how much of a down payment you scrape together.

FHA loans also come with an annual mortgage insurance premium that ranges from 0.45 percent to 1.05 percent of your mortgage amount, depending on your loan's term and down payment. You'll pay this amount for 11 years or until you pay off your entire mortgage loan, again depending on your down payment and the length of your loan.

A tougher appraisal?

Chris Morenza, a real estate agent with RE/MAX Gold in Miami, said that sellers often worry that an appraisal conducted for an FHA loan will come in at a lower amount than an appraisal of the same property when the buyers are using a conventional mortgage.

Morenza said that he once represented a seller in which the buyers' mortgage lender first ordered a conventional appraisal. In that appraisal, the appraiser valued the home at just above the purchase price. The lender then realized that the buyers needed FHA financing. When the lender ordered a new appraisal from a HUD-approved appraiser, the home was valued $25,000 lower than it was during the conventional appraisal.

"Even when we tried to dispute it, they did not budge," Morenza said.

Morenza said that the $25,000 difference represented more than 10 percent of the conventional appraised value of $230,000.

Will sellers pass up your offer?

Yates said that an FHA loan could hurt buyers if they aren't the only ones making an offer on a home.

"If there are multiple offers on a home, sellers tend to give preference to borrowers with conventional financing," Yates said.

Why is that? Sellers worry that if they accept an offer from a borrower with FHA financing, they'll run into problems during both the home appraisal and home inspection processes.

To close an FHA loan, an appraiser approved by the U.S. Department of Housing and Urban Development will have to determine the current market value of the home. After an offer is accepted and a contract signed, a home inspector will tour the home to ensure it meets HUD's minimum property standards. The phrase “minimum property standards” makes some sellers nervous.

Of course, buyers can, and should, request a home inspection with all loans, whether they are using FHA or conventional financing. But the minimum standards for a home's condition are stricter for an FHA loan, Yates said. Sellers will have to make the repairs necessary to meet these minimum standards before the sale can close.

This can scare some sellers away from FHA buyers, especially when they have more than one offer on their residences.

"Sellers don't want to make repairs, and further delay closing, when conventional loans have much more lenient requirements," Yates said.

Weaker buyers?

Some sellers believe, too, that borrowers who are taking out FHA loans do not have strong credit. They worry that FHA buyers are less likely to get approved for their mortgage loans, scuttling their home sale and wasting their time, Yates said.

"Conventional loans have higher minimum requirements than FHA and require a larger down payment," Yates said. "Sellers prefer a buyer with conventional financing over FHA financing because they feel the buyer is in a better financial position."

JW Roeder, a real estate agent with Reece Nichols Realtors in Overland Park, Kansas, agreed that FHA buyers might face resistance when making an offer on a home. He said it all comes down to the perceptions that sellers have regarding FHA loans.

This can be a more serious challenge in competitive markets where homes are more likely to generate multiple offers, Roeder said. In these markets, sellers might shy away from FHA buyers and choose instead to accept offers from buyers with conventional loans.

"Sellers anticipate that buyers with a conventional loan are better qualified and can close quicker and with fewer hiccups along the way," Roeder said. "Peace of mind is a huge plus for sellers and plays a huge role in the decision-making process."

FHA alternatives

If you are worried that sellers will balk at your FHA offer, here’s some good news: FHA loans aren’t the only ones that require low down payments.

You can qualify for a conventional loan backed by Fannie Mae that requires down payments as low as 3 percent of your home’s purchase price for borrowers with good credit. Just as with an FHA loan, you’ll have to work with a mortgage lender to apply for one of these loans.