Qualified offers from buyers using FHA or VA financing don’t stand a chance in today’s seller’s market. That’s because two government policies meant to protect them from unsafe properties and exorbitant prices eliminate them from competitive sales as soon as their bids are opened.
To ensure that properties are not overvalued, FHA and VA loans require sellers to reduce the agreed-upon purchase price to match the appraised value within five percent — or the deal can’t proceed. Buyers using conventional loans have more flexibility to address low appraisals, but not those using FHA or VA.
Appraisers are also required to inspect properties and report threats to health, security or safety, such as the lack of safety handrails in open staircases, peeling or chipping paint, and windows or doors without locks.
Repairs must be made before the loan can close, or the lender can set up an escrow account for the repairs to be completed afterward.
“There has to be a property inspection for an FHA sale. With a conventional loan, a buyer and a seller can agree to purchase with no inspection. Still, FHA won’t allow that,” said Garth Rieman, director of Housing Advocacy and Strategic Initiatives for the National Council of State Housing Finance Agencies (NCSHA).
Agents play a critical role in the process. “In my experience, sellers’ perceptions are based on what they hear about FHA from their real estate agents,” Lisa DeBrock, Division Director, Homeownership for the Washington State Housing Finance Commission, told the Down Payment Report.
“For example, many agents think that FHA appraisals are more difficult than conventional ones. Any appraisal of an older home might raise concerns that need to be addressed for the home to qualify. Still, loan officers tell me that the cost to bring these properties up to par is usually minimal.”
An April survey of Realtors by the National Association of Realtors (NAR) found that 89 percent sellers would be likely to accept an offer from a buyer with a conventional loan. On the other hand, only 30 percent would be likely to accept an offer from a buyer using an FHA or VA loan, and 6 percent of sellers said they would not even consider an offer from an FHA or VA buyer.
According to a new analysis by two scholars at the Urban Institute, “Some 60 percent of Black and Latino homebuyers use FHA financing. Home Mortgage Disclosure Act data shows that flat-out rejection of buyers seeking government-backed loans disadvantaged households with lower incomes, lower credit scores, and less wealth, many of whom are people of color.”
“In a hot housing market, borrowers using FHA or VA mortgages are at a disadvantage to those using conventional mortgages. And the borrowers who disproportionately use these mortgages are the families of color who have historically been excluded from homeownership and could most benefit from today’s low-interest rates,” The Urban Institute’s Laurie Goodman and Janneke Ratcliffe wrote in a June 16 blog post.
“As a result, it is more difficult for these borrowers to compete for homes, which exacerbates the racial homeownership gap,” the article mentioned. Despite the boom in sales, that gap has been widening.
As Libertina Brandt reported in this June Inman article, “the homeownership rate among Black Americans in the first quarter of 2021 clocked in at 45.1 percent compared to 73.8 percent among white Americans, according to the results of a new survey released Wednesday by Redfin.”
“To whatever extent buyers are not considering FHA offers, it is affecting people of color because FHA is so valuable to them,” Rieman said. HUD Public Affairs did not provide a comment.
FHA and VA loans also are essential to first-time buyers, who account for about four out of every five FHA purchase loans. As the unpopularity of government-insured financing escalated during the spring and summer, first-time buyers’ share of sales fell from 35 percent in June 2020 to 30 percent a year later.
Closing times for both FHA and VA purchase loans have both increased by eight days over the past year as buyers using government-backed financing struggle to find a home.
The Urban Institute brief suggested that “the FHA and VA could more closely align their rules with Fannie Mae, Freddie Mac, and HUD. The VA could consider either eliminating the home inspection or making it less prescriptive. HUD and the VA could consider making appraisal requirements more flexible, using the same rules currently applied to loans purchased by Fannie Mae and Freddie Mac.”
Steve Cook edits The Down Payment Report for Down Payment Resource and writes for leading real estate blogs and news outlets. He has been vice president of public affairs at the National Association of Realtors, a broadcast news correspondent, Congressional press secretary, and top executive for an international public relations firm.