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FHA, VA Loan Demand Drops on Higher Rates

March 24, 2022

First-time buyers and veterans may be facing increasing obstacles to affording homeownership. In response, mortgage applications for home purchases involving Federal Housing Administration and Veterans Affairs loans are falling. The loans tend to be popular with first-time buyers, veterans, and those with lower incomes less able to pay a large down payment for a home purchase.

“First-time home buyers who rely on these government programs are increasingly challenged by both the rapid increase in home prices and higher mortgage rates,” Mike Fratantoni, chief economist of the Mortgage Bankers Association, said in a statement.

A survey by the National Association of REALTORS® in the summer of 2021 showed house hunters using conventional financing were edging out buyers using government-backed loans. Eighty-nine percent of sellers would be more likely to accept an offer from a buyer with conventional financing. Only 30% said they would be willing to accept one using an FHA or a VA loan.

Buyers who are making an offer using FHA or VA financing are finding it difficult to compete against buyers who are offering cash or using conventional financing. Some real estate pros say it’s because VA and FHA loans tend to have low appraisals, problematic when home prices are rising fast and homes are selling quickly. Also, government-backed loans tend to be slower to close.

Nevertheless, mortgage demand softened across the board last week, regardless of loan type, with economists pointing to a sharp increase in mortgage rates.

Total mortgage application volume dropped 8.1% last week compared to the previous week, the MBA’s seasonally adjusted index shows. Also, the average contract interest rate on a 30-year fixed-rate mortgage with conforming loan balances rose to 4.50%, a significant jump from 4.27% the previous week and from the below-4% rates that were more common at the beginning of the year.