With its record high prices and bitter bidding wars, this real estate boom poses challenges, even for homebuyers with deep pockets. But for borrowers who finance their purchases with mortgages guaranteed by the Federal Housing Administration or the US Department of Veterans Affairs, the hurdles are particularly high.
Bidders using FHA loans and VA loans often have their bids rejected by sellers and listing agents weighing multiple bids. No official statistic tracks buyers’ refusals to finance with FHA loans and VA loans, but real estate professionals say the reality is clear: Fannie Mae and Freddie Mac. In bidding wars, FHA and VA buyers may be sent back to the back of the pack.
âIt’s hard to quantify, but everyone who works on the streets feels it and sees it,â says Brian Floyd, loan officer at Fairway Independent Mortgage in Concord, North Carolina. âThe market is hyper-competitive. When it’s hypercompetitive, you accumulate several offers. Many salespeople try to simplify this exhaustive amount of information that is in front of them. How the hell are you supposed to analyze 50 deals? “
For sellers overwhelmed with offers, analysis often simply means eliminating offers backed by VA or FHA loans. With their low down payment requirements and more flexible rules regarding credit scores, it is commonly accepted that VA or FHA loans are more risky.
âFHA and VA buyers are at a disadvantage in today’s market,â says Gary Acosta, CEO of the National Association of Hispanic Real Estate Professionals. âIt hurts all first-time home buyers because they’re more likely to use government programs. “
How VA and FHA loans differ from conventional loans
VA and FHA loans have less onerous restrictions than conventional loans. While the standard down payment is 20 percent, VA loans require no down payment and FHA loans have a minimum of 3.5 percent.
For conventional loans, the best mortgage rates go to borrowers with a credit score of 740 or higher. But VA and FHA loans offer competitive rates to borrowers with credit scores in their 600s.
Many sellers and listing agents hear about permissive standards for VA and FHA loans, and they think the bidders using those mortgages must be âbad buyers,â Floyd says.
There is some logic to this assumption: if a buyer doesn’t have money for a down payment, how will that borrower react if the appraisal is lower than expected, or if the inspection finds repairs? unexpected? Many sellers decide that there is too much uncertainty associated with VA and FHA loans.
âThey’re worried about who will be responsible when the inspection and assessment returns,â says Floyd.
Myths persist about VA and FHA mortgages
Meanwhile, there are quirks in the inspections and other processes around FHA and VA loans that frighten some listing agents.
âMaybe an agent had a bad experience with a VA loan in 2012,â says Floyd. “Since then, they’ve put VA loans in a box.”
VA has made strides in streamlining its once awkward processes. For example, VA borrowers no longer have to wait weeks to be declared eligible for VA loans; this step can now be completed quickly online.
While VA lenders have worked to dispel what they call the myths about VA dog loans, old reputations die hard.
âWe have real estate agents who haven’t updated their understanding,â says Leigh Brown, real estate agent in Concord, North Carolina. âIn their minds, the process is expensive.
Advice to borrowers: find the right real estate agent
When Brown spoke at the National Association of Realtors annual conference this month, she urged her fellow agents to rethink their stereotypes about FHA and VA loans.
âAs real estate agents, we need to stop having prejudices and prejudices against VA loans and FHA loans,â Brown told the group. “These loans are not from the devil.”
Mortgage programs play an important role in the housing market, she argued. FHA loans help first-time home buyers, and VA loans provide a valuable benefit 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: âHow do you feel about FHA loans? “
âIf they say, ‘You’ll never win,’ find another real estate agent,â Brown says.
An agent who understands FHA and VA loans can serve as an attorney on behalf of borrowers using these loan programs. A real estate agent with a strong reputation in the market can alleviate some of the reluctance towards government guaranteed loans, Acosta explains.
Borrower advice: Find a lender who supports you
Floyd says he is taking an active role on behalf of borrowers with VA loans. After submitting an offer, Floyd often calls the seller’s agent to allay any concerns.
âI want to let you know that this is a very solid offer,â Floyd told the listing agent. He asks if the agent has any concerns about VA loans, then he explains the appraisal process or offers assurances about the buyer’s financial situation.
Floyd himself is a VA borrower. He has toured Iraq twice as an army infantryman and likes the VA mortgage option of not depositing anything. As a buyer, Floyd had the money to pay for the repairs, but he preferred to finance the full purchase price.
âThe VA loan is such a better deal,â he says.
As a loan officer, Floyd sometimes submits offers with approvals for a VA loan and a conventional loan. He tells the seller and listing agent that the buyer prefers to take the military advantage, but will change course if the VA process encounters a problem.
âIf anything comes up, fine,â he said. âI’m going to flip the switch to conventional. “