Norma Eason always wanted to buy a house and believed that now she was ready.
The 31-year-old has bolstered her savings and researched buying a home. Eason, a babysitter at the University of Pennsylvania, and her husband, who works in construction, have been pre-approved for a loan backed by the Federal Housing Administration. They began their search in March for a place for themselves and their four young children.
Their first offer on a house was rejected. Just like their second and third.
“It’s depressing, but you have to keep going,” Eason said. “It’s very difficult. Because there are so many people looking for a home right now. “
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Her real estate agent suggested that she pay off some of her credit card debt to increase her credit rating and improve her financial standing as a buyer. Eason was already on the verge of qualifying for a conventional loan, so to increase her chances of securing a home, she decided to try this type of loan and a higher mortgage than the $ 150,000 she approved. for the time being.
In today’s ultra-competitive housing market, where some buyers are offering cash, paying above asking price, and forgoing contingencies, some buyers’ agents are suggesting that clients forgo FHA loans to improve their chances. with sellers. FHA ratings are stricter when it comes to home inspections for health and safety issues, and FHA borrowers historically have less cash.
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FHA mortgages are intended to make home ownership accessible to people who would otherwise face barriers in obtaining loans, focusing on first-time homebuyers, the traditionally underserved racial groups in the market. conventional and those with low to moderate incomes. They require lower credit scores than conventional loans.
The FHA loan is “an instrument of equity,” said Adrian Garcia, director of fair housing and commercial property at the Pennsylvania Human Relations Commission.
Recently, sellers have expressed their preferences for conventional mortgages, particularly in “the more highly competitive housing markets in areas of the country subject to the COVID crisis,” said Morgan Williams, general counsel at the National Fair Housing Alliance. . Hearing these reports prompted the organization to start looking into the prevalence of the practice, he said.
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“It is very worrying,” he said. “If, on a case-by-case basis, sellers set policies that ultimately exclude an important route to credit for buyers of color, they ultimately set policies that effectively exclude borrowers. colored. “
Usually home sellers don’t care what loan a buyer uses to buy a property. But they care about the price they can get and the likelihood of closing the sale. The current housing market strongly favors sellers, thanks to strong demand from buyers and low supply of housing, so sellers hold much of the power. Some buyers are forgoing home inspection as a condition of sale to make their offers more attractive – a move that most real estate agents strongly advise against. FHA assessments, however, include health and safety inspections and require pre-sale repairs.
“It’s a sellers market. They don’t want to fix what they don’t need, ”said Jaene Bindom, a RE / MAX Access agent who works with Eason. “And they don’t have to.
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Additionally, if a sale with an FHA appraisal does not end, that appraisal still applies to prospective FHA buyers interested in that property for the next six months. Thus, sellers could be disadvantaged by a lower estimated value in an environment of bidding wars and soaring prices. If the agreed sale price is greater than appraised value, sellers can ask buyers to pay the difference, which can put those with FHA loans – who often don’t have the extra cash – out of the race.
Because salespeople have more leverage, “they have the ability to seek out the cleanest, easiest deal as well as the best price,” said Tom Toole III, Team Leader at Tom Toole Sales Group with RE / MAX Main Line. “Cash offers are a really effective strategy right now,” he said, because they eliminate the need for appraisal contingencies, the condition that an appraiser must appraise the home at or above the sale price. satisfy a lender and for a contract to be binding. .
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An analysis of the Philadelphia Deeds that the Pew Charitable Trusts released last year found that in 2018, nearly two in three homes that sold below the median sale price were bought for cash. Many are investors. Thus, FHA borrowers in the cheapest part of the market compete with buyers offering cash, as well as those with conventional mortgages.
In some cases, “the FHA offers that are presented are not even considered,” said Abraham Reyes Pardo, director of housing at the Philadelphia Urban League. “As a seller, you have more certainty – quote, not quote – that the transaction will proceed if it is backed by a conventional loan” backed by more liquid assets.
The National Association of Realtors said it had heard that FHA borrowers were being kept out of the market and was monitoring the matter. The association is reviewing FHA lending requirements and rules to offer suggestions on how the government can improve FHA programs, which the association strongly supports.
Most aspiring home buyers advised by the Philadelphia City League can barely meet credit score and other requirements to qualify for FHA loans, Reyes Pardo said, so conventional loans are out of reach. . Some strive to break cycles of generational poverty.
Nationally, FHA loans represent about 15% of residential mortgages. In Philadelphia, about 32% of mortgages issued for single-family primary residences were FHA insured in 2019, according to an analysis of the latest available federal mortgage data.
A seller’s decision to opt for one type of loan product over another “seems neutral at first glance, but when you look at its impact” it can be discriminatory if it puts groups of people who are protected at a disadvantage. under the Fair Housing Act, including people of color and single mothers, Garcia told the Pennsylvania Human Relations Commission.
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The Fair Housing Act protects various populations from housing discrimination, but it “does not prevent sellers from accepting the most financially advantageous offer for their own benefit,” said Rachel Wentworth, executive director of Housing Equality Pennsylvania Center. The group has responded to calls from people about potential discrimination due to record housing supply.
Philadelphia-based financial advisory nonprofit Clarifi saw clients with FHA loans transferred during the auction wars, said Chelsea Barrish, vice president of program impact.
“So a lot of our buyers are looking to look to conventional mortgages to be more competitive in their home deals,” she said. “What they hear from their real estate agents when they make offers is that they will be more likely to get their offers accepted if they have a conventional loan.”
Garcia also heard this and said that “no one should actively keep someone away” from FHA loans. Over the next year, the Pennsylvania Human Relations Commission plans to analyze home sales data and monitor the number of home buyers using FHA loans to see if this is a widespread trend. Garcia said.
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Market pressures show no signs of abating. According to Berkshire Hathaway HomeServices Fox & Roach, the Greater Philadelphia area had a month-long home supply in April, meaning the number of homes on the market would sell in a month at the current sales rate. In April 2020, the region had five months of housing supply.
Williams, of the National Fair Housing Alliance, said real estate trading organizations could give advice to agents to help them discourage blanket lending preferences that could lead to discrimination.
Buyers with any type of loan should educate themselves about the process and be as prepared as possible, said Reyes Pardo of the Philadelphia Urban League. Buyers should be looking to improve their financial profile so that they can get the type of loan they want.
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In this competitive market, sellers tend to prefer buyers with liquid assets, he said, so subsidies can help soften any offer. Many lenders offer assistance, particularly to first-time home buyers. A grant program that Philadelphians relied on for help with closing costs and down payment, Philly First Home, ran out of funds in September. In March, the Pennsylvania Housing Finance Agency launched a program called K-FIT grant loans for these fees. Ten percent of the loan is forgiven each year for 10 years, and homeowners pay back what’s left if they move out sooner.
“Some clients using FHA loans have been able to close because they have this additional resource,” Reyes Pardo said. “In this type of market, it makes a huge difference.”