Home Buyers With Government Loans Struggle to Compete

Hurdles in a field

©John Rensten - Getty Images

Government-backed loans can offer lower down payment requirements and help some aspiring buyers purchase a home. But these loans often come with several extra requirements that may slow the process and put some at a disadvantage in a fast-paced offer situation.

Eighty-nine percent of sellers would be likely to accept an offer from a buyer with conventional financing, but only 30% would be willing to accept one using a Federal Housing Administration or Veterans Affairs loan, according to an April survey of real estate professionals conducted by the National Association of REALTORS®. Six percent of agents say their sellers would not consider an offer using a government-backed loan.

Government-backed loans have long been known to help low-income and first-time home buyers make a home purchase, offering low down payment requirements.

But conventional loans continue to edge out government-backed loans. Consider August 2019, when 30% of mortgage loans were backed by the Federal Housing Administration, Department of Veterans Affairs, or Department of Agriculture. By August 2021, the share of government-backed loans had dropped to 23%, according to NAR data.

“It’s just dismaying how difficult it is for first-time buyers to be able to snag that home,” Gay Cororaton, senior economist at the National Association of REALTORS®, told realtor.com®.

More than half of buyers—52%—who got a mortgage in May paid at least a 20% down payment. A decade ago, only 40% of buyers were making at least a 20% down payment, according to NAR data.

A seller may look more favorably on a buyer who has at least can make a 20% down payment than those who may be bringing less. Statistically, buyers who can offer higher down payments are more likely to have their mortgages approved, allowing the deal to proceed. Also, government-backed loans can be slower to close. The average time to close on an FHA or VA purchase loan in the first three months of this year was 57 and 58 days, respectively, compared to 51 days for conventional loans.

“What I am looking at is the strength of the buyer financially, and that is typically measured by how much money they’re putting down, how big their down payment,” Bryan Kyle, a real estate professional with First Serve Realty in Las Vegas, told realtor.com®.

Borrowers with VA loans have no down payment requirement, but their loan may come with other requirements for approval, such as appraisals and inspections. Those extra requirements could slow a transaction, and some sellers may find them more cumbersome than those of buyers who are bringing higher financing or an all-cash offer or who are willing to waive inspections or appraisals.

“Right now, it’s a very tight market, so sellers also just want to close the deal,” Kyle told realtor.com®. “What we’re seeing is that buyers are forgoing inspections, they’re forgoing appraisals, and it’s harder to do that for an FHA or a VA loan.”

To stand out, some buyers with government-backed offers are putting more cash into an earnest money account to show a stronger commitment to close on a house. Kyle Reed, a real estate professional at Paul Presley Realty in Austin, Texas, told realtor.com® he encourages many of his military veteran clients who use VA loans to consider new-home construction.

“When it comes to VA buyers specifically, a lot of times new-construction homes are a way for them,” he says. “It’s less competitive, you’re not getting in those multiple-offer situations, you don’t have to worry about lender-required repairs or anything like that.”