Using an FHA Loan in 2022: Will It Help or Hurt Your Chance at a House?

Reader question: “We are planning to use an FHA loan in 2022 to purchase the house. Will using an FHA loan help us or hurt us in a competitive real estate market? Is there a chance the seller will turn down our offer?”

This is a common question among home buyers these days, and with good reason. We all know the real estate market is highly competitive right now, due to low inventory and strong demand. As a result, borrowers using a government-backed mortgage program like FHA or VA might wonder if it will hurt their chances of buying a house in 2022.

It’s a legitimate concern. We’ve heard and read numerous anecdotal reports about home buyers who were turned down by sellers because they were using FHA loans or VA loans. We’ve even written about this subject in the past, explaining how an FHA loan might work against you in a hot seller’s market.

But what about in 2022? After all, it’s a brand new year. Will we see any major changes in the real estate market this year? Could using an FHA loan work against you in 2022?

In short, what can home buyers expect this year, when using an FHA-insured mortgage loan?

Using an FHA Loan to Buy a House in 2022

Our advice is to use the mortgage loan program that’s best for you, based on your particular needs. That might be a conventional, FHA, or VA home loan. Different borrowers use different financing methods for different reasons.

With that being said, you should know that an FHA loan could work against you in 2022. That doesn’t mean it’s impossible to buy a house with an FHA loan in a hot real estate market. But it does mean you could encounter some occasional “resistance” from sellers.

FHA-insured mortgage loans have certain requirements that conventional loans do not. For instance, the FHA home appraisal process also includes a property inspection to ensure the house meets HUD’s minimum requirements.

That’s not the case for a conventional loan. The home appraisal for a conventional mortgage does not have an inspection component. The appraiser simply wants to know how much the house is worth.

But with an FHA loan, the appraiser also wants to know what condition the property is in. He or she might create a list of discrepancies that could interfere with financing. The same is true for VA home loans used by military folks.

This is why some sellers can be reluctant to accept an offer that’s backed by an FHA loan. Not all sellers look down upon government-insured mortgages. But some do. That’s just the reality of the real estate market.

And speaking of the market…

A Look at Current Housing Market Conditions

So, what can we expect from the U.S. real estate market in 2022? And how might it affect you when using an FHA loan to buy a house?

Recent forecasts suggest that the housing market will continue to be highly competitive in 2022. This is a carryover from last year, and it’s directly related to an ongoing shortage of housing supply. The short version is that there aren’t enough homes for sale to meet the demand from buyers. This makes it a seller’s market.

In the current real estate environment, buyers have to compete with one another for limited inventory. They have to make their offers as attractive as possible, in order to get the seller’s attention. And this is one area where using an FHA loan could be problematic in 2022.

If you’re one of a handful of buyers submitting offers for a particular house, the seller has the luxury to pick and choose. They’ll consider the amount of money being offered, but also the type of financing involved. If the seller feels that a conventional mortgage loan might be less problematic, they have the right to choose such an offer.

We are still in a hot real estate market, with strong demand and competition among buyers. As a result, using an FHA loan to buy a house in 2022 could potentially cause issues for the borrower. Or not. A lot depends on local real estate conditions, in the area where you plan to buy.

But there’s also some good news for FHA loan home buyers. Some industry analysts expect to see more inventory coming onto the market in 2022. For instance, a January 6th housing report from stated: “we expect better luck in the coming months as more sellers plan to enter the market.”

FHA Loan Limits Increased for 2022

Here’s more good news for people planning to use an FHA loan in 2022. The official mortgage limits were increased for this year, in response to rising home prices nationwide.

This means borrowers have a higher level of financing to work with.

In 2022, the maximum FHA mortgage size for a single-family home purchase ranges from $420,680 to $970,800. These limits vary by county because they are based on median home prices. In remote areas like Alaska, Hawaii, Guam and the Virgin Islands, FHA loan limits are now well over $1 million.

Keep an Eye on Rising Home Prices

We talked about real estate market conditions, and how they could affect you when using an FHA-insured mortgage loan in 2022. Rising house prices are another important trend to keep an eye on.

Over the past year or so, we have seen record-breaking home price growth. According to Zillow, home values in the U.S. rose by nearly 20% (on average) in the past 12 months alone. In some of the nation’s hottest housing markets, prices rose by more than 30% last year.

This is an important trend for those who are planning to use an FHA loan in 2022. Well we might see a bit of a slowdown this year, economists expect home prices to continue climbing to some degree.

Buyers who stay on the fence until later this year could pay a price for it.