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FHA and VA Buyers Struggle to Compete in Today’s Market

Only 30% of sellers are OK with a VA or FHA loan because buyers can’t easily forego things like inspections to compete – plus the home appraisals often come in low.

WASHINGTON – House hunters with conventional financing are edging out buyers using government-backed loans.

A new study of real estate agents by the National Association of Realtors® (NAR) found that 89% of sellers would likely accept an offer from a buyer with conventional financing, but only 30% would be willing to accept one using a Federal Housing Administration (FHA) or Veterans Affairs (VA) loan.

In a recent Urban Institute (UI) article, researchers Janneke Ratcliffe and Laurie Goodman said rejection of government-backed loans puts buyers with lower incomes at a disadvantage, notably those with lower credit scores and less wealth.

As a result, homebuyers making an offer using FHA or VA financing find it difficult to compete against buyers offering cash or using conventional financing. Some real estate pros say it’s because VA and FHA loans tend to have “low appraisals,” which makes it difficult when home prices are rising fast and homes are selling quickly.

Also, government-backed loans can take longer to close. The average time to close on an FHA or VA purchase loan in the first three months of 2021 was 57 and 58 days, respectively, compared to 51 days for conventional loans.

VA and FHA buyers also have less latitude to waive appraisals or inspections to close on a transaction quickly, a common tool used by buyers today to win bidding wars. FHA and VA buyers can’t generally waive these contingencies due to their loan guidelines.

The problem is reflected in the percentages of approved VA and FHA loans. The share of FHA-insured mortgages dropped to 14% of total mortgages in May. In years past, FHA loans accounted for about 20% of the mortgage market, according to NAR data. The share of VA-guaranteed loans also decreased to 7% in May.

UI’s Ratcliffe and Goodman are calling on the Department of Housing and Urban Development (HUD) to help level the playing field for those using VA and FHA loans. They want HUD to consider eliminating some of the home inspection requirements and offer more flexible appraisals that are similar to conventional financing.

“Reducing these barriers can help government borrowers gain more equal footing with conventional borrowers,” they write. “It is just one of many steps that could shrink the racial homeownership gap and make the mortgage market fairer and more equitable for all borrowers.”

Source: “Sellers Are Rejecting FHA/VA Backed Offers,” Mortgage News Daily (July 6, 2021) and “More Homebuyers Making 20% Down Payments and Waiving Appraisal and Inspection Contract Contingencies,” National Association of REALTORS® Economists’ Outlook blog (June 23, 2021)

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