Pervasive myths about FHA, VA financing may take housing opportunities away from those who need them the most, experts say.

Sellers and their agents may decide not to accept offers from FHA buyers based on pervasive myths about FHA financing, and that can have the effect of creating another barrier to homeownership for lower-income households and people of color, who rely more on these loans, experts said at the Fair Housing Policy Committee meeting during the 2023 REALTORS® Legislative Meetings in Washington, D.C.

The share of Black and Hispanic home buyers who use FHA financing is double that of any other loan product, said David Sanchez, special policy advisor with the Federal Housing Administration. And with 84% of FHA loans going to first-time buyers last year, there’s a risk that misunderstandings around FHA financing are keeping many would-be buyers from building wealth through homeownership, he added.

Home Front 2023

Sometimes, it’s the listing agent who advises the seller to reject buyers with certain financing. Fair housing laws don’t prohibit sellers from making decisions based on buyers’ financing, but Sanchez urged audience members to do their part to remove barriers to homeownership, not to facilitate them. “Right now, there’s less competition in the market, which affords more opportunity to advocate for your buyers,” he suggested.

Sanchez implored practitioners to become better educated on FHA financing and help bust myths, including that FHA loans take longer to close—data shows they actually close faster than conventional loans—and that minimum standards for property condition are too stringent. “FHA minimum standards may require sellers to make repairs to the property, but the purpose is to make sure the home is safe, sound and secure for the borrower,” Sanchez said. “It ensures buyers who are low-income are moving into a home that will suit their needs for the next few years.”

FHA Commissioner Julia Gordon also was at the REALTORS® Legislative Meetings, speaking at the Regulatory Issues Forum

Stigma Around VA Loans, Too

There are similar misunderstandings about VA loans, said James Heaslet, chief of construction and valuation at the Department of Veterans Affairs. Many people believe that because VA loans don’t require a down payment, veterans—who comprise 14% of the homebuying market—“don’t have skin in the game” and aren’t attuned to being a responsible homeowner, he said. “Well, I had skin in the game when I raised my right hand and vowed to serve my country,” quipped Heaslet, who is a veteran himself.

Many listing agents and sellers may incorrectly believe that because VA buyers don’t need a down payment, they’re not financially prepared for homeownership. The reality is that the average VA buyer has a FICO score above 700 and $40,000 in cash reserves, Heaslet said. On top of that, only 4% of VA loans went into default in 2021 compared to 10% of FHA loans.

Veterans also tend to become invested in the community, as many have been away from home for extensive periods of time and are eager to reconnect to their roots, Heaslet said. Sellers who are interested in passing on their home to someone who will truly care for it would be wise to consider VA buyers. “In a seller’s market, we know cash is king—but we also know that cash usually comes from an investor,” he said. Investors typically turn properties into short- or long-term rentals, removing ownership opportunities for others. “When you accept a cash offer from an investor, it’s a short-term win but a long-term loss,” Heaslet added.

Ultimately, agents need to focus on what their sellers want and need—and financing may not be one of their concerns, Heaslet said. It’s often not necessary for listing agents to put emphasis on a buyer’s finances unless their sellers have particular concerns. “Sellers care about price and terms and conditions of a contract,” he said.