What Inspections Does Fha Require – The housing market has experienced strong home price appreciation and tight supply over the past year. That’s good news for sellers, many of whom are getting multiple offers on their homes, but it could be bad news for borrowers backed by the Federal Housing Administration (FHA) and the U.S. Department of Veterans Affairs (VA). A recent National Association of Realtors survey of its agents found that 89 percent of sellers would accept an offer from a buyer with a conventional loan, but only 30 percent would accept an offer from a buyer using FHA. or a VA loan. Meanwhile, 6 percent of sellers said they would not even consider an FHA or VA buyer’s offer.
A simple analysis of home mortgage disclosure law data shows that rejection by buyers of government-backed loans disadvantages families with low incomes, low credit scores and low wealth, many of whom are people of color. As a result, it is more difficult for these borrowers to compete for housing, which widens the racial home ownership gap.
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To understand current trends, we calculated the share of government and government-sponsored enterprise (GSE) procurement credit sources by channel over the past 4.5 years. We excluded bank portfolio loans and private-label bonds from this analysis because we did not have complete data for these loans.
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From mid-2017 to May 2020, FHA’s share of the agency market ranged from 21.5 to 24.0 percent, with an average of 22.8 percent. It has come down to 18.9 percent in the last two months. A similar but more muted pattern is evident in the VA share, which averaged 11.5 percent from mid-2017 to May 2020, but has fallen to 10.3 percent in the past two months. This represents a significant shift away from government-insured mortgages. Although a small portion of the decline was due to home values rising above FHA loan limits, loan limits increased in January 2021, while FHA and VA stocks continued to fall.
FHA and VA mortgages serve borrowers with low incomes, low wealth, and low credit scores because these mortgages have flexibility in credit scores, credit-to-income requirements, and down payments. And because of our nation’s history of racial discrimination, many borrowers with these characteristics are people of color. For purchase sources for 2019 (the latest Home Mortgage Act data), 15.0 percent of FHA borrowers and 13.1 percent of VA borrowers were black, compared to only 4.9 percent of conventional borrowers, and 23.0 percent of FHA borrowers and 11.9 percent of VA borrowers. Hispanic, compared to 11.1 percent of typical borrowers. We find that 41.9 percent of FHA borrowers and 36.3 percent of VA borrowers are younger than 35, compared to 33.6 percent of conventional mortgage borrowers.
In a hot housing market, borrowers using FHA or VA mortgages are at a disadvantage compared to those using conventional mortgages. Borrowers who disproportionately use these mortgages, families of color historically excluded from homeownership, may benefit most from today’s low interest rates.
In its loan category survey, the National Association of Realtors said its agents found FHA and VA loans “less attractive” to sellers than conventional loans. Home inspection requirements topped the list, followed by appraisal issues, longer time to closing and lower down payments.
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Home Inspections: Government mortgages require a home inspection by an approved inspector. They look for defects that could pose health, safety and security risks. The most common defects include the lack of safety handrails on open staircases with three or more steps; appliances, floor coverings and roofs with a useful life of less than two years; Homes built before 1978 (about half of America’s single-family housing stock) have peeling or paint; and malfunctioning windows. A conventional loan does not require a home inspection because the price is assumed to reflect the condition of the home.
Appraisals: For a government loan, if the home is appraised for less than the agreed-upon price, the seller must reduce the purchase price to match the appraised price or the deal cannot proceed. If the borrower re-lists the home, the appraisal stays on the home for 120 days. With a conventional loan, if the home appraises for less than the agreed-upon price, the parties can renegotiate the price, and the buyer pays the difference between the renegotiated purchase price and the appraised value. This gives the seller more flexibility if the property fails to appraise.
Time to Close: Government loans take longer to close, often because repairs are needed. In the first three months of 2021, Ellie Mae’s loan origination report notes that it took an average of 6 to 7 days longer to close on an FHA or VA purchase loan (57 to 58 days) than a conventional purchase loan (51 days).
Low down payment: Conventional loans typically require a 20 percent down payment or private mortgage insurance, while government-backed loans allow for lower down payments. This is a big reason why government loans are disproportionately used by first-time, low-wealth and younger borrowers. It’s not clear why a seller would care about a buyer’s mortgage financing unless a low down payment is a sure proxy for closing.
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The federal government should consider several measures to make the government loan process more efficient and make first-time borrowers, borrowers with limited assets, and borrowers of color more competitive in the housing market. For example, the FHA and VA could align their rules more closely with those of Fannie Mae and Freddie Mac, so government loans are no longer disadvantageous. The U.S. Department of Housing and Development (HUD) and the VA may eliminate or reduce the home inspection. Similarly, HUD and VA could consider making appraisal requirements more flexible, using the same rules that currently apply to GSE mortgages.
By reducing these barriers, government borrowers can gain an equal footing with regular borrowers. This is one of many steps that can reduce the racial home ownership gap and make the mortgage market fairer and more equitable for all borrowers.
The company has the resources to show what it takes to create a community where everyone has a fair shot at achieving their vision of success. Written by Mia Taylor Mia Taylor Arrow Right Contributing Writer Mia Taylor is a contributor and award-winning journalist with two decades of experience working as a staff reporter or contributor for some of the nation’s leading newspapers and websites, including The Atlanta Journal. Constitution, San Diego Union-Tribune, TheStreet, MSN and Credit.com. Mia Taylor
Edited by Suzanne De Vita Edited by Suzanne De VitaArrow Right Mortgage Editor Suzanne De Vita is a mortgage editor focusing on mortgage and real estate topics for home buyers, homeowners, investors and renters. Connect with Suzanne De Vita on LinkedIn Linkedin Suzanne De Vita Email Connect with Suzanne De Vita via email
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