FHA loans require the home to be appraised at the property's market value, and the appraiser also checks for specific safety features in the house. This is because there can be legitimate concerns about the condition of these properties, Neil Brooks, president of NewDay USA, a mortgage lender, told MarketWatch. Brooks is also a real-estate agent.
&#34;A lot of people out there are trying to sell their junk, and the ... FHA doesn't want to have a first-time home buyer or a veteran buy a house that's going to cost them a ton of money that they may or may not have to fix up after they move in,&#34; Brooks said. VA loans face similar requirements from sellers, he added.
Secondly, the FHA has stricter appraisal requirements because the government is backing the mortgage, and it wants to make sure that the property's value is not inflated. Home sellers also cannot sell flipped properties to FHA buyers if they had bought it less than 91 days prior, Vega said.
Given these contingencies, there is a risk that the buyer's offer may fall through, which means the seller would have to find a new buyer. And that makes the FHA loan seem less desirable to some sellers, the Philly Fed researchers noted.
But experienced real-estate agents can work around these issues.
If the property's sale price is lower than the appraised value, some appraisers give the seller's agents the opportunity to argue why the home should be valued higher, Brooks said.
They may reach out before finishing the appraisal and ask for a list of improvements done to the house or upgrades that can help support this value, he said.
Buyers can also combat the negative perceptions of FHA loans by putting more money down to show how serious they are about buying the house.
Buyers could also schedule a private home inspection with the sellers before submitting an offer so all parties are aware of the property's deficiencies and whether it would pass an FHA appraisal.
Why the Johnsons chose an FHA loan
Back in Milwaukee, an FHA loan worked well for the Johnsons because the loan requirements allowed for a higher debt-to-income ratio, or DTI, which measures how much monthly debt a buyer has compared to their income.
Andrea Johnson runs her own hair salon and her income varies significantly each year, as does her DTI, which proved a challenge when trying to qualify for a conventional mortgage.
Lenders typically don't want home buyers to have a high DTI. The most common reason that lenders reject a buyer's mortgage application is because of a high debt-to-income ratio, according to an annual report by the National Association of Realtors.
Related: The 5 most common reasons home buyers get rejected for a mortgage
Conventional loans which are resold to Fannie Mae only allow buyers' DTI to go up to 50% - meaning that no more than 50% of their gross monthly income should be allocated to their total monthly debt payments, including the new mortgage payment. FHA allows buyers' DTI to go up to 57%.
After losing offers to other buyers, the Johnsons' real estate agent, Alex Derenne, found her own way to address the FHA loan stigma.
When touring homes, the agent and the couple started looking for any property defects or issues that could pose a concern for an FHA appraiser. By keeping an eye out for possible concerns that could be a problem during the sale, they were able to address them in their initial offer to the sellers so their purchase agreement would go through smoothly.
Derenne noticed some sagging on the roof and worn-out shingles during their first showing at the house the Johnsons ended up buying. She highlighted these to the seller as possible flaws that an FHA inspector would flag. &#34;We were transparent with the seller that we were certain an FHA inspector would not pass the roof in its current state,&#34; she explained, &#34;and were able to negotiate with the seller to replace the roof prior to the closing at the seller's expense.&#34;
The Johnsons decided on a four-bedroom, nearly 2,700 square foot home listed at $495,000 and offered $510,000. As the only buyers to place an offer on that house, that helped them gain leverage to negotiate with the seller.
Andrea and Mike Johnson closed on the home in early July.
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-Aarthi Swaminathan
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<p>More home buyers are turning to FHA loans due to their flexible debt-to-income ratio requirements, despite stricter appraisal standards. The Johnsons in Milwaukee chose an FHA loan for its higher DTI allowance, overcoming challenges with their agent's help. FHA loans require appraisals to ensure property value and safety, posing risks for sellers. Experienced agents can mitigate these issues, as seen in the Johnsons' successful negotiation for a new roof before closing.</p>

More home buyers are turning to this type of -2-