Why Homesellers Are Shunning FHA And VA Affords
FHA and VA loans are essential for first time buyers who make up about four in five FHA purchase loans. However, in today’s marketplace, sellers are quick to turn down offers that come with this type of financing. Here’s why.
Qualified offers from buyers with FHA or VA financing have no chance in today’s seller market. That’s because two government policies designed to protect them from unsafe real estate and exorbitant prices exclude them from competitive sales once their listings are opened.
To ensure real estate isn’t overvalued, FHA and VA loans require sellers to reduce the agreed purchase price to meet the appraised value within five percent – or the deal cannot go through. Buyers using conventional loans have more flexibility to address low ratings, but not those using FHA or VA.
Appraisers are also required to inspect properties and report health, safety, or security hazards such as lack of safety handrails in open stairwells, peeling or peeling paint, and windows or doors without locks.
Repairs must be done before the loan is closed, or the lender can set up an escrow account to complete the repairs afterwards.
“A property inspection must take place for an FHA sale. With a conventional loan, the buyer and seller can agree to purchase without review. Still, the FHA will not allow that, ”said Garth Rieman, director of housing representation and strategic initiatives for the National Council of State Housing Finance Agencies (NCSHA).
Agents play a crucial role in this. “In my experience, sellers’ perceptions are based on what their real estate agents tell them about FHA,” Lisa DeBrock, division director, homeownership for the Washington State Housing Finance Commission, told the Down Payment Report.
“For example, many agents think that FHA assessments are more difficult than traditional ones. Any rating of an older home can raise concerns that must be addressed in order for the home to be considered. Still, loan officers tell me that the cost of bringing these properties up to par is usually minimal. ”
An April survey of realtors by the National Association of Brokers (POMEGRANATE) found that 89 percent of sellers were likely to accept an offer from a traditional loan buyer. On the flip side, only 30 percent would likely take 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 scientists at the Urban Institute, “Some 60 percent of black and Latin American homebuyers are taking advantage of FHA funding. The Home Mortgage Disclosure Act data shows that the strict rejection of buyers seeking government-sponsored credit penalizes disadvantaged households with lower incomes, lower credit scores, and fewer wealth, many of whom are black. “
“In a hot housing market, borrowers using FHA or VA mortgages are at a disadvantage compared to those using conventional mortgages. And the borrowers who are taking disproportionately high levels of these mortgages are the colored families who were previously excluded from home ownership and who could benefit most from today’s low interest rates, ”write Laurie Goodman and Janneke Ratcliffe of the Urban Institute in a Blog post from June 16.
“As a result, it is more difficult for these borrowers to compete for homes, exacerbating the racial homeownership gap,” the article reads. Despite the sales boom, this gap has widened.
As Libertina Brandt reported in this June Inman article, “The home ownership rate among black Americans was 45.1 percent in the first quarter of 2021 compared to 73.8 percent among white Americans, according to a new poll published Wednesday by Redfin demonstrate.”
“To whatever extent buyers don’t consider FHA deals, it affects people with color because FHA is so valuable to them,” said Rieman. HUD Public Affairs did not leave a comment.
FHA and VA loans are also important for first time buyers about four out of five FHA purchase loans. Since the unpopularity of state-insured financing escalated in spring and summer, the share of sales attributable to first-time buyers fell from 35 percent in June 2020 30 percent a year later.
Closing times for both FHA and VA purchase loans have increased by eight days over the past year as buyers taking advantage of government-sponsored finance struggle to find a home.
The Urban Institute letter suggested that “the FHA and VA could coordinate their rules more closely with Fannie Mae, Freddie Mac and HUD. The VA could consider either removing the home inspection or making it less mandatory. HUD and the VA might consider making the rating requirements more flexible and using the same rules that currently apply to loans bought 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 agencies. He was vice president of public affairs for the National Association of Realtors, broadcast correspondent, congressional press secretary, and executive at an international public relations firm.