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House hunters using conventional financing are edging out buyers using government-backed loans, a new study finds.
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 a recent survey of real estate professionals from the National Association of REALTORS®. Six percent of agents say their sellers would not consider an offer using a government-backed loan.
In a recent Urban Institute article, researchers Janneke Ratcliffe and Laurie Goodman say such rejection of government-backed loans is disadvantaging buyers with lower incomes, lower credit scores, and less wealth.
Home buyers who are making an offer using FHA or VA financing are finding it difficult to compete against buyers who are offering cash or using conventional financing. Some real estate pros say it’s because VA and FHA loans tend to have “low appraisals” and that is proving problematic when home prices are rising fast and homes are selling quickly.
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.
Some buyers have been waiving appraisals or inspections to close on a transaction quickly and get their offers to stand out. But FHA and VA buyers are unable to waive these contingencies due to their loan guidelines.
The share of FHA-insured mortgages has been dropping, reaching 14% of total mortgages in May. In years past, FHA loans have 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 to help level the playing field for those using VA and FHA loans by considering eliminating some of the home inspection requirements and offering 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.”