With its record-breaking prices and sharp-elbowed bidding wars, this housing boom poses challenges even for deep-pocketed homebuyers. But for borrowers financing their purchases with mortgages backed by the Federal Housing Administration or the U.S. Department of Veterans Affairs, the hurdles are especially high.
Bidders using FHA loans and VA loans often find their offers rejected by sellers and listing agents weighing multiple offers. No official statistic tracks denials for buyers financing with FHA loans and VA loans, but real estate professionals say the reality is clear: Sellers place the highest value on cash offers, followed by bids financed with 20 percent down payments and loans that fit the guidelines of Fannie Mae and Freddie Mac. In bidding wars, FHA and VA buyers can be shunted to the back of the pack.
“It’s hard to quantify it, but everybody who works on the street feels and and sees it,” says Brian Floyd, a loan officer at Fairway Independent Mortgage in Concord, North Carolina. “The market is hypercompetitive. When it’s hypercompetitive, you’re stacking up multiple deals. A lot of sellers are trying to simplify that exhaustive amount of information that’s in front of them. How in the world are you supposed to analyze 50 offers?”
For sellers overwhelmed with bids, the analysis often means simply eliminating bids backed by VA or FHA loans. With their low down payment requirements and looser rules around credit scores, the conventional wisdom goes, VA or FHA loans pose more risk.
“FHA and VA buyers are at a disadvantage in today’s marketplace,” says Gary Acosta, CEO of the National Association of Hispanic Real Estate Professionals. “It’s hurting first-time homebuyers across the board, because they’re more likely to use government programs.”
How VA, FHA loans differ from conventional loans
Both VA and FHA loans impose less onerous restrictions than conventional loans. While the standard down payment is 20 percent, VA loans require nothing down, and FHA loans have a minimum of 3.5 percent down.
For conventional loans, the best mortgage rates go to borrowers with credit scores of 740 or higher. But VA and FHA loans offer competitive rates to borrowers with credit scores in the 600s.
Many sellers and listing agents hear about the permissive standards for VA and FHA loans, and they think bidders using those mortgages must be “bad buyers,” Floyd says.
There is some logic to that assumption: If a buyer doesn’t have money for a down payment, how will that borrower respond if the appraisal comes in lower than expected, or if the inspection finds surprise repairs? Many sellers decide there’s too much uncertainty associated with VA and FHA loans.
“They’re worried about who’s going to be on the hook when the inspection and the appraisal comes back,” Floyd says.
Myths endure about VA, FHA mortgages
Meanwhile, there are quirks in inspections and other processes around FHA and VA loans that frighten some listing agents.
“Maybe an agent had a bad experience with a VA loan in 2012,” Floyd says. “Since then, they’ve put VA loans in a box.”
The VA has made strides to streamline its once-clunky processes. For instance, VA borrowers no longer have to wait weeks to be declared eligible for VA loans; that step now can be completed quickly online.
While VA lenders have worked to dispel what they call the myths that dog VA loans, old reputations die hard.
“We have Realtors who have not updated their understanding,” says Leigh Brown, a Realtor in Concord, North Carolina. “In their head, the process is onerous.”
Borrower tip: Find the right Realtor
When Brown took the stage at the National Association of Realtors’ annual conference this month, she urged fellow agents to rethink their stereotypes about FHA and VA loans.
“As Realtors, we need to stop being so prejudiced and biased against VA loans and FHA loans,” Brown told the group. “Those loans are not of the devil.”
The mortgage programs play an important role in the housing market, she argued. FHA loans help first-time buyers achieve homeownership, and VA loans provide a valuable perk to current and former members of the military.
In an interview with Bankrate, Brown said buyers should ask their real estate agents a simple question: “How do you feel about FHA loans?”
“If they say, ‘You’ll never win,’ find another Realtor,” Brown says.
An agent who understands FHA and VA loans can serve as an advocate on behalf of borrowers using those loan programs. A Realtor with a strong reputation in the market can smooth over some of the reticence about government-backed loans, Acosta says.
Borrower tip: Find a lender who takes your side
Floyd says he takes an active role on behalf of borrowers with VA loans. After they submit an offer, Floyd often calls the seller’s agent to allay any concerns.
“I want to let you know that this is a very solid offer,” Floyd tells the listing agent. He asks if the agent has any concerns about VA loans, and then he explains the appraisal process or offers reassurances about the buyer’s financial position.
Floyd is a VA borrower himself. He served two tours in Iraq as an Army infantryman, and he likes the VA mortgage program’s option to put nothing down. As a buyer, Floyd had money to pay for repairs, but he preferred financing the entire purchase price.
“The VA loan is just such a better deal,” he says.
As a loan officer, Floyd sometimes submits offers with approvals for both a VA loan and a conventional loan. He tells the seller and the listing agent that the buyer prefers to take advantage of the military benefit but will change course if the VA process hits a snag.
“If anything pops up, fine,” he says. “I’ll flip the switch to conventional.”