Using an FHA Loan in a Hot Seller’s Market

It’s still a sellers real estate market in 2021, and some home buyers with FHA loans are having a hard time competing. But why? In this article, we will explore the potential downsides and disadvantages of using an FHA loan in a highly competitive seller’s market.

We won’t sugarcoat it. Using a government-backed mortgage loan when buying a house in a hot real estate market could work against you. As a home buyer, this is definitely something you should be aware of.

In 2021, tight inventory conditions and strong demand from buyers have created a highly competitive seller’s market. This kind of scenario occurs when there aren’t enough properties for sale to satisfy the demand.

As a result of these trends, some home buyers who are using FHA loans in 2021 have had a hard time competing with other offers. Let’s explore the reasons why this happens.

What Is a Seller’s Market, Exactly?

Could using an FHA loan in a seller’s real estate market work against you, as a home buyer? It’s possible.

In order to understand the reasons why, we must first understand some key concepts:

  • FHA loan: This is a home mortgage loan that is insured by the Federal Housing Administration (part of HUD). FHA loans offer some advantages to borrowers, including the ability to make a down payment as low as 3.5%. This program is often used by borrowers who have had a hard time qualifying for conventional or “regular” home loans. As a result of the government backing, FHA loans are generally easier to qualify for when compared to conventional mortgage financing.
  • Seller’s market: In a real estate context, a seller’s market occurs when there are not enough homes available to meet the demand from buyers. In other words, it’s when demand greatly exceeds the available supply. That’s where we’ve been for most of 2021. It has been a strong seller’s market due to chronically low inventory levels and strong demand from buyers.

In this kind of “lopsided” real estate scenario, sellers have the luxury of choosing the best offer among many. (Or what they believe to be the best offer.)

Could an FHA Loan Work Against You?

So, how might an FHA loan work against you in a seller’s market? It all has to do with the homeowner’s perception.

A lot of sellers are wary of accepting an offer from a home buyer with an FHA loan, because they consider it a riskier mortgage product compared to conventional financing.

There are two reasons for this perception:

1. Required home appraisal / inspection.

Because it’s a government-backed mortgage loan, the FHA program requires a home to be appraised before the deal can go through. In addition to determining the market value of the property, the appraiser will also check to make sure it meets the minimum property requirements assigned by HUD.

Some sellers worry that they will be required to make costly repairs or other accommodations in order for the FHA loan to be approved. Conventional mortgage financing, on the other hand, does not have these kinds of government-imposed property inspection requirements.

2. A negative perception toward FHA borrowers.

As mentioned earlier, FHA loans are often used by borrowers who have had trouble qualifying for conventional or regular mortgage financing. Granted, this isn’t true in every FHA home-buying scenario. But there is some validity to it.

It can be easier to qualify for an FHA loan when compared to conventional mortgages. As a result, this program tends to attract borrowers who might have had credit problems in the past. Some sellers view this as a negative, fearing that the deal might fall through before it reaches the finish line.

To summarize, certain sellers might consider FHA home buyers to be the riskier option, compared to a buyer with conventional financing. They might worry that they’ll have more inspection and repair-related “hoops” to jump through, along with a higher risk of the deal falling through.

Sellers Can Be Picky in a Hot Market

To be clear: Some FHA home buyers are just as “solid” as those who use conventional mortgage loans. There are FHA borrowers with good credit and significant financial assets. Even so, there is a fairly high percentage of borrowers with credit problems who turn to this program as a last resort.

The bottom line is that using an FHA loan in a hot seller’s market could potentially work against you.

When a homeowner has many offers to choose from, they can put what they believe to be the stronger offers at the top and shove the others aside. That’s just the reality of buying a home in a hot real estate market. Sellers can be picky when it comes to accepting or rejecting an offer.

Related: What sellers should know about FHA loans

Patience and Persistence Will See You Through

So what’s an FHA home buyer to do in this scenario? How can you compete in a hot housing market?

Buying a home in a seller’s market requires patience and persistence, regardless of the type of mortgage loan being used.If you’ve already determined that the FHA program is the best option for you, you might want to stick with it. Eventually, you could find a homeowner who is willing to accept your offer.

On the other hand, if you’ve already made multiple offers and keep getting turned down, it might be time to rethink your strategy. Maybe a conventional mortgage loan would work better, at least while the seller’s market conditions persist.

This is where it helps to have a real estate agent. An experienced agent will know what it takes to get an offer accepted. He or she will have some knowledge of FHA loans and how they hold up in the current real estate market. As a home buyer, you need to understand what the real estate market is like in your area. A good agent will shed light on it for you.

Disclaimer: This article is not meant to discourage or dissuade you from using an FHA loan to buy a house. Ultimately, you have to choose the best mortgage program based on your particular needs and financing goals. Our goal here is to explain the possible disadvantages of using an FHA loan in a highly competitive seller’s real estate market.