If the condition of the home does not meet the FHA guidlines, your lender will not grant you an FHA loan on the home.
As with any seller, banks, want to go to contract with the buyer most likely to close the transaction. If the home does not meet FHA requirements it would be a colossal waste of time for all involved
to go forward.
A conventional loan is a little less strict because it has a much higher downpayment requirement
so the risk to the bank is less.
Believe me, 'there is a method and a justification to all the madness'.
Hope this helps, and if I can be of further assistance, just pick up the phone and give me a call.
If the seller believes that the property can't pass FHA guidelines, they would care about the type of loan you are going to apply for.
Normally, FHA has tighter restrictions than a conventional loan.
I hope this helps.