Mortgage desire is shutting some FHA-backed consumers out of Philly space’s sizzling housing market
Norma Eason always wanted to buy a house and believed she was ready now.
The 31-year-old topped up her savings and did research to buy a house. Eason, a custodian at the University of Pennsylvania, and her husband, who works in construction, received pre-approval for a Federal Housing Administration-supported loan. In March they started looking for a place for themselves and their four young children.
Her first offer for a house was turned down. Likewise her second and third.
“It’s depressing, but you have to keep going,” said Eason. “It’s very challenging. Because there are so many people who are currently looking for a home. “
»READ MORE: The supply of homes for sale in the Philadelphia area is likely to remain low for a while
Her real estate agent suggested paying off some credit card debt to improve her creditworthiness and improve her financial position as a buyer. Eason was already close to qualifying for a conventional loan. To increase her chances of getting a home, she decided to apply for this type of loan and a mortgage in excess of the $ 150,000 for which she is currently approved.
In the current highly competitive housing market, where some buyers are offering cash, paying above asking price, and foregoing contingencies, some buyer agents are suggesting their clients move away from FHA loans to improve their chances with the sellers. FHA ratings are more stringent when inspecting homes for health and safety concerns, and FHA borrowers have historically had less cash on hand.
FHA mortgages are designed to provide home ownership access for people who would otherwise face barriers to borrowing, with an emphasis on first-time home buyers, traditionally underserved racial groups and those with low to middle incomes. They require lower credit scores than traditional loans.
The FHA loan is “an instrument of equity,” said Adrian Garcia, director of fair living and commercial real estate for the Pennsylvania Human Relations Commission.
»READ MORE: Trying to Buy a Home in the Philly Area Hot Market? Get ready to fight.
Sellers have recently expressed preferences for conventional mortgages, particularly in “more competitive housing markets in regions across the country amid the COVID crisis,” said Morgan Williams, general counsel at the National Fair Housing Alliance. Hearing these reports prompted the organization to investigate the spread of the practice, he said.
“That is very important,” he said. “When sellers set guidelines on a case-by-case basis that ultimately preclude critical access to credit for color buyers, they ultimately set guidelines that result in color borrowers being excluded.”
In general, home sellers don’t care what loan a buyer uses to buy a property. But they care about the price they can get and the likelihood of completing the sale. The current housing market strongly favors sellers due to high buyer demand and low housing supply, so sellers have much of the power. Some buyers are foregoing the home inspection as a contingency for the sale to make their listings more attractive – a move most real estate agents are strongly opposed to. However, FHA assessments include health and safety inspections and require repairs prior to sale.
“It’s a sellers’ market. They don’t want to fix something they don’t need to fix, ”said Jaene Bindom, an agent at RE / MAX Access who works with Eason. “And you don’t have to.”
»READ MORE: Home inspections are a trump card in the hot real estate market in the Philly area
Even if a sale does not complete with an FHA rating, that rating will continue to apply to future FHA buyers interested in that property for the next four months. In an environment of bidding wars and exploding prices, sellers could be disadvantaged by a lower estimate. If the agreed sale price is higher than the appraised value, sellers can ask buyers to pay the difference, which can throw those with FHA loans – who often don’t have extra cash – out of the running.
As sellers have more leverage, “they have the opportunity to search for the cleanest, easiest deal and the best price,” said Tom Toole III, team leader, Tom Toole Sales Group at RE / MAX Main Line. “Cash offers are a really effective strategy right now,” he said, because it eliminates the need for appraisal quotas, the requirement that an appraiser must value the home at selling price or higher in order to satisfy a lender and make a contract binding.
An analysis of the doings in Philadelphia published by the Pew Charitable Trusts last year found that in 2018, nearly two out of three homes that sold below average were bought with cash. Many are investors. For example, FHA borrowers at the lower end of the market compete with buyers offering cash and those with conventional mortgages.
In some cases, “FHA deals that are presented are not even considered,” said Abraham Reyes Pardo, director of housing for the Urban League of Philadelphia. “As a seller, you have more certainty – quote, not quote – that the transaction will take place if it is secured by a conventional loan”, supported by more liquid funds.
The National Association of Realtors said it heard concerns about FHA borrowers being kept out of the market and is monitoring the issue. The association is reviewing FHA loan requirements and rules to make suggestions on how the government can improve the FHA programs that the association strongly supports.
»READ MORE: An analysis of what happened in Philadelphia reflects the challenges faced by low and middle income homebuyers
Most of the budding home buyers advised by the Urban League of Philadelphia can barely meet creditworthiness and other requirements to qualify for FHA loans, Reyes Pardo said, leaving conventional loans out of reach. Some are working to break the cycles of generational poverty.
Nationally, FHA loans account for around 15% of residential mortgages. In Philadelphia, around 32% of single-family primary residence mortgages were FHA-insured in 2019, according to an analysis of the latest federal mortgage data available.
A seller’s decision to choose one type of credit product over another “looks neutral at first glance, but when you look at the effects” can be discriminatory if it puts people at a disadvantage after fair housing Act, including people of color and women who are single parents, said Garcia of the Pennsylvania Human Relations Commission.
The Fair Housing Act protects various groups of the population from discrimination in housing, but “does not prohibit sellers from accepting the cheapest offer in their own interest,” said Rachel Wentworth, executive director of the Housing Equality Center of Pennsylvania. The group has been taking calls from people about possible discrimination due to the record low housing supply.
Philadelphia-based nonprofit financial advisory firm Clarifi has seen clients with FHA loans bypassed during bidding wars, said Chelsea Barrish, vice president of Program Impact.
»READ MORE: Homes in black neighborhoods are less valued than similar homes in white neighborhoods
“So many of our buyers are looking to conventional mortgages to be more competitive in their home offers,” she said. “What they hear from their brokers when they make offers is that they are more likely to take their offers if they have traditional credit.”
Garcia heard this too, saying “no one should actively prevent anyone from” getting FHA loans. Over the next year, the Pennsylvania Human Relations Commission plans to analyze home sales data and monitor the number of buyers using FHA loans to see if this is a widespread trend, Garcia said.
The market pressure is not easing. According to Berkshire Hathaway HomeServices Fox & Roach, the Greater Philadelphia area had a month’s housing supply in April, which means the number of homes in the market would be sold in a month at the current rate of sales. In April 2020, the region had five months of housing on offer.
Williams, of the National Fair Housing Alliance, said real estate trading organizations could issue guidelines to realtors to discourage blanket credit preferences that could lead to discrimination.
Buyers with any type of credit should read up on the process and prepare as best they can, said Reyes Pardo of the Urban League of Philadelphia. Buyers should try to improve their financial profile so that they can get any type of loan that they want.
In this competitive market, sellers tend to favor buyers with cash, he said, so grants can help sweeten any offering. Many lenders offer assistance, especially for first-time home buyers. Philly First Home, a scholarship program Philadelphians relied on for closure and down payment costs, ran out in September. In March, the Pennsylvania Housing Finance Agency started a program called K-FIT to provide loans for these costs. Ten percent of the loan is canceled each year for ten years, and homeowners pay back what is left if they move sooner.
“Some customers using FHA loans have been able to close because they have this additional resource,” Reyes Pardo said. “It makes a big difference in this type of market.”
»READ MORE: Black Philadelphia tenants are evicted more than twice as often as white tenants
This story has been updated to reflect the FHA’s new rules on how long ratings apply to certain properties.