FHA Bias: Originators Need To Educate Real Estate Agents

How Pervasive?

How widespread this issue is, no one knows. It’s hard to prove that a seller agent is being biased, even in the above-mentioned scenario. After all offers have been submitted, it’s up to the seller to choose which one to accept, along with some guidance from the agent. Only the two parties know what happens in that conversation or if the agent is steering the client away from FHA offers.

Connecticut-based Realtor Alexa Hughes says a good, ethical agent will act as a co-pilot in this situation and simply educate their client on what each offer entails. “It is the Realtor’s job not to share too much of their personal opinion, but rather to educate and inform,” she said.

But not all agents act ethically, or they don’t want their clients to deal with some of the challenges that come with FHA loans, such as a stricter appraisal and safety inspection.

Even buyer agents could be biased, and try to persuade their clients to switch to conventional with down payment assistance (DPA). After submitting countless offers with an FHA loan, the buyer and agent are exhausted and think switching to conventional could be the life-preserver they need.

However, real estate agents are not mortgage experts. They are in no position to judge which loan is best for the client or make judgments against FHA without understanding all the details of the program. Doing so would only hurt their business or even threaten their license.

“I try to educate every listing agent I get to talk to that is uncomfortable with FHA and, hopefully, it helps a little bit. But, you know, there’s a lot of them out there that are prejudiced against FHA,” said Nicholas Barta, division president and loan originator with Security First Financial.

For the past few years, a large segment of homebuyers have been on the sidelines waiting for the market to become more affordable. Now that overall originations are down, loan officers cannot afford to let this stigma continue. Denying FHA borrowers the opportunity to own a home, means denying originators more business.

Here are the major points originators should make when educating real estate agents on the FHA loan program.

Conventional Ain’t All That

Barta is the fourth top FHA originator in the nation, and he’s had to address the stigma around the loans countless times. That’s why he takes it upon himself to educate real estate agents on the FHA loan program to dispel some of these myths.

Barta’s FHA clients are usually first-time homebuyers between the ages of 20 and 35, with a credit score ranging between 660 and 680. In many cases, those clients could qualify for a conventional loan, but what many real estate agents don’t understand is that the client is better off being well-qualified for an FHA loan than barely qualifying for a conventional loan.

“If you compare an FHA loan with a conventional loan at a 660 credit score, the conventional loan is going to have higher mortgage insurance and higher interest rates,” Barta said. “So the FHA loan is more affordable.”

Watch it on The Interest:Beating The Bias

Given how much home prices have grown over the past few years while income has not kept up, it makes more sense to switch from conventional to FHA. For example, a buyer that qualifies for a $300,000 home on a conventional loan would most likely qualify for a bigger loan amount, like $375,000, with an FHA loan.

“We have those conversations a lot with real estate agents who are like, ‘Oh, I’m just going to take them [the client] to conventional.’ I’m like, well, you can, but you have to back down their approval amount by 75,000,” Barta said. “And that usually changes their mind.”

Even when listing agents put “will not accept FHA” in the listing description, they may be doing their client a huge disservice by limiting the pool of potential buyers. Barta explains these listing agents are limiting competition and the amount of money the seller could make.

Addressing Myths

It’s the agent’s responsibility to help sellers get the best deal possible, so they may want to avoid any added costs the seller has to pay due to the FHA inspection or appraisal. However, Barta says the costs to get a home up to FHA standards has been overblown.

“Normally, if we get a condition on an FHA loan, it’s a missing light fixture or your outlet covers are gone … there’s not a discharge pipe on the hot water heater,” Barta said. “The average cost of the repairs is probably $200 … it’s not like it’s gonna change the seller’s distribution a whole lot.”

“There’s always creative solutions as far as, let’s say the home needs the railing,” said Hughes. “These appraisers aren’t out there like trying to kill deals, right? But if the seller has identified there’s holes in the roof, you know, there’s major issues with this home, then certainly that’s a different conversation to be had upfront versus later on.”

Another common misconception is that FHA loans take 60 days or longer to close, but Barta says that’s not true either. He is able to close FHA loans and conventional loans in the same time frame. And the article by NAR states that data shows FHA loans actually close faster than conventional loans.

“I think that 20 years ago, appraisers were tougher on [FHA] properties. And that has really changed. I mean, there’s just a lot of those misconceptions that aren’t there anymore,” Barta said.

Winning Deals With FHA

Hughes has worked with plenty of FHA clients in the past, and knows how to craft a winning offer. Originators can review these tips with buyer agents before they suggest switching the client over to a conventional loan.

Although Hughes does not recommend waiving inspection, because that may end up costing the client a significant amount in repairs, she does recommend submitting the offer as-is to make it more competitive.

“This means you’re able to inspect, however, it is for informational purposes only,” Hughes said. “Nothing’s a guarantee. Someone can purchase and then the next day the water heater goes, but at least they’re able to be informed and have that inspection and then decide, am I comfortable moving forward?”

Another suggestion is increasing the escrow amount or the deposit amount that someone puts down and is applied to their down payment at closing. This, essentially, allows the buyer to put more skin in the game. This deposit amount is also contingent on the contractual dates, like how many days the client has to get the property inspected. There’s also the appraisal contingency and mortgage contingency in which the client receives the mortgage approval letter from the lender on or before a specific date in the contract. All of that keeps the buyer’s deposit safe.

“It’s a way for them to make their offer more appealing,” Hughes said. “Certainly, if someone’s putting $1 down in escrow versus $50,000 down in escrow, that’s another factor the seller’s able to measure as far as mitigating risk and how serious the buyer is.”

Sometimes, the buyer can even increase the offer amount, as long as the buyer is comfortable with that and the lender approves it. The loan officer will then explain to their client what that purchase price means in terms of monthly payments. Although the buyer may be pre-approved for a $300,000 loan, based on the client’s lifestyle and spending habits, they might be more comfortable with a $270,000 loan. To avoid confusion or relaying misinformation, the agent should always tell their client to have this conversation with their loan officer.

The Potential Dangers

The share of Black and Hispanic home buyers who use FHA financing is double that of any other loan product, said David Sanchez, special policy advisor with the Federal Housing Administration. And with 84% of FHA loans going to first-time buyers in 2022, there’s a risk that this bias will prevent many would-be buyers from achieving homeownership.

“If we start saying, ‘Hey, we’re not gonna take FHA financing,’ you know, indiscriminately, they’re redlining,” Barta said. “Whether they’re redlining on skin color or they’re redlining on … income level.”

Just because a buyer is going for the affordable loan option does not mean they are not qualified borrowers. Considering how much home prices have inflated over the past few years and income has remained the same, it’s simply smarter for these buyers to go with an FHA loan.

The same issue goes for VA loans, which comprise 14% of the homebuying market. James Heaslet, chief of construction and valuation at the U.S. Department of Veterans Affairs, said sellers and seller agents think these veterans “don’t have enough skin in the game,” and aren’t thought of as responsible homeowners.

 “Well, I had skin in the game when I raised my right hand and vowed to serve my country,” said Heaslet, a veteran.

In fact, the average FICO score among veterans is above 700 and they typically have around $40,000 in cash reserves, according to NAR.

“We get the same prejudice for VA loans and it’s really disheartening,” Barta said. “However, we still get a lot of them accepted. I think that you have to be extremely positive and extremely straightforward with people.”

Additionally, Hughes proves that not all real estate agents are biased against FHA and VA loans. NAR recently met with legislators at the Federal Housing Finance Agency (FHFA) to argue against a proposed fee that’s based on the borrower’s debt-to-income ratio. They argued that this would end up hurting FHA borrowers and the overall market, and thankfully, the FHFA listened.

“We really applaud FHFA for listening to our industry’s concerns and choosing to drop the fee on the borrowers with higher debt income ratios that, of course, would impose a cost on borrowers during a time in the market when affordability is already stretched,” Hughes said.