FHA, VA and other government-backed loans are often favored by first-time and low-income buyers. But in bidding wars, cash offers or conventional financing seem less problematic to sellers. As a result, low-income buyers face yet another hurdle if they hope to become owners.
WASHINGTON – Government-backed loans can offer buyers lower down payment requirements and can help some of them purchase a home.
However, those loans often come with several extra requirements that may slow the process and put some at a disadvantage in a fast-paced offer situation. That unknown detail – whether or not the government will step in and require changes, notably ones the seller may be required to make – put these buyers at a disadvantage in a hot sellers’ market.
While 89% of sellers say they’re likely to accept an offer from a buyer with conventional financing, only 30% would be willing to accept one using a Federal Housing Administration (FHA) or Veterans Affairs (VA) loan, according to an April survey of real estate professionals conducted by the National Association of Realtors® (NAR). And 6% of agents say their sellers wouldn’t even 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, in large part due to their low down payment requirements.
But today, conventional loans continue to edge out government-backed loans. In August 2019, 30% of mortgage loans were backed by the Federal Housing Administration, Department of Veterans Affairs or Department of Agriculture. In August 2021, the share of government-backed loans dropped to 23%, according to NAR.
“It’s just dismaying how difficult it is for first-time buyers to be able to snag that home,” Gay Cororaton, senior economist at NAR told realtor.com.
More than half of buyers (52%) who got a mortgage in May paid at least a 20% down. A decade ago, only 40% of buyers were making at least a 20% down payment, according to NAR.
A seller may look more favorably on a buyer who has at least a 20% down payment than those bringing less. Statistically, buyers who 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,” says Bryan Kyle, a real estate professional with First Serve Realty in Las Vegas.
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 bringing higher financing or an all-cash offer, or in a bidding war, buyers willing to waive inspections or appraisals.
“Right now, it’s a very tight market, so sellers also just want to close the deal,” Kyle says. “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, says 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.”
Source: “Can Homebuyers With Government-Backed Loans Compete in Today’s Hot Housing Market?” realtor.com® (Oct. 14, 2021); “2021 Loan Type Survey” National Association of REALTORS® Research Group (April 2021).
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