Will sellers accept offers with federal assistance?

Q: We want to buy a home with little or nothing down. We qualify for a VA mortgage, and will also consider FHA financing. The broker says some sellers prefer conventional financing and will not accept offers that involve federal insurance. Is this a common problem?

A: Right now, with little inventory, many listings receive multiple offers and sellers have their pick. Many properties are selling at or above listing prices and sellers can often get all-cash offers, meaning they don’t have to worry about buyers qualifying with a lender.

A loan-type survey published in April by the National Association of Realtors (NAR) found that top seller worries include stricter home inspection requirements, home appraisal contingencies, the possibility that the home will not appraise, offers with little down and longer closing times.

Seller worries are influencing buyer offers. In June, NAR reported that “among contract contingencies waived by the buyers, the most common contingency that buyers waived was the appraisal contingency (28%) followed by the inspection contingency (25%).”

In effect, sellers sometimes don’t like the very protections that buyers should expect when making the biggest purchase of a lifetime. And buyers are often willing to waive important contingencies to buy a home at a time when bidding wars are common and inventory is low.

The Urban Institute explains that the “flat-out rejection of buyers seeking government-backed loans disadvantages households with lower incomes, lower credit scores and less wealth, many of whom are people of color. As a result, it is more difficult for these borrowers to compete for homes, which exacerbates the racial homeownership gap.”

Millions of borrowers use government-backed real estate financing because such loans are their best options, financing with a proven record, no gotcha clauses and little or nothing down. The consumer protections in the VA and FHA programs have value, and financing without them increases risk for buyers.

And yet, figures from the Urban Institute also show that market share for both the FHA and VA programs has declined. Is this simply because both programs have so many borrower protections, or are other factors at work?

Most likely, there are several factors that have pushed down the use of federal programs.

First, there’s competition. Conforming financing from Fannie Mae and Freddie Mac is now available with 3% down.

Second, the FHA loan limit is likely holding down the use of that program in areas with fast-rising home prices. Before the pandemic, the median price of an existing home was $274,500 in December 2019 according to NAR. By August 2021 that same typical property was priced at $356,700 — an increase of $82,200.

Third, there’s a tremendous inventory shortage. We have lots of buyers and relatively few available properties. Sellers have substantial leverage. Redfin reported that 59% of its August transactions involved two or more bids. The era of the bidding war has eased up, but it’s still with us — and it’s likely to continue for some time.