Sellers Are Rejecting Offers That Come With FHA and VA Financing

Today's buyers may face added challenges if they're not coming in with a conventional mortgage.

Buying a home today is no easy feat. While mortgage rates are nice and competitive, there's a major shortage of property listings that's making today's housing market very tough to navigate. Not only are buyers being forced to compromise on home features, but they're also being forced to pay a premium to snag a place of their own.

As a general economic rule, whenever a commodity is in short supply and demand for it is high, its price tends to go up. Such is the case in the housing market today. Home prices have soared on a national level, and that alone is making it harder for buyers to qualify for high enough mortgages to make owning property possible.

But these aren't the only challenges buyers today are facing. Some buyers may have a harder time getting their offers accepted -- not because they aren't high enough, but because sellers aren't happy with the type of mortgage those offers are tied to.

Sellers are rejecting FHA and VA loans

Many people who apply for a home loan take out a conventional mortgage. But many buyers turn to FHA and VA loans to purchase a place to live.

FHA loans allow buyers to purchase a home with as little as 3.5% down, whereas conventional mortgages generally require a higher down payment. Some conventional mortgage lenders will take as little as 5% down, but often, buyers will need to put down a minimum of 10%. VA loans, meanwhile, allow buyers to purchase a home with no money down at all.

Both FHA and VA loans have been around for years, and they're backed by solid guarantees from the Federal Housing Administration and the Veterans Administration, respectively. Yet in a recent survey by the National Association of Realtors, only 30% of sellers say they'd likely accept an offer from a buyer who's planning to use an FHA or VA loan. By contrast, 89% of sellers would likely accept an offer from a buyer with a conventional mortgage.

This sentiment could put lower-income buyers at a severe disadvantage. It could also close off buying opportunities for a wide range of prospective homeowners, including some who may not necessarily be on the lower side of the income spectrum, but rather, be U.S. military members or veterans who want to take advantage of the VA loan program.

Why are sellers rejecting these loans? Data from the Urban Institute shows that sellers associate these loan products with stricter home inspection requirements and home appraisal contingencies. Of course, home appraisals are a requirement for any mortgage. But for FHA and VA loans, sellers must reduce their homes' purchase prices to match their appraised values, so it's easy to see why some may be less than eager to work with buyers who are coming in with these types of financing.

Because it's a seller's market, those who put their properties up for sale can afford to be choosier than usual. But that could hurt a lot of buyers and make it even more difficult for them to enjoy the benefits of homeownership.