Consumer advocate says policy changes are needed to help FHA buyers compete

The Consumer Federation of America (CFA) is calling for policy changes that would help alleviate the difficulties for homebuyers using Federal Housing Administration (FHA) loans when competing in tight markets.

Buyers using FHA loans often face stigmas and cannot use many of the competitive strategies commonly utilized by conventional borrowers and cash buyers, according to a recent report from the CFA. 

“As first-time homebuyers and homebuyers of color disproportionately rely on FHA, the stigma of this mortgage product makes it even harder for them to buy a home,” according to the report authored by the CFA’s Sharon Cornelissen and Austin Harrison.

“The stigma associated with FHA is stronger when markets are highly competitive and in places where FHA is less common, including more affluent and white communities.”

The report calls on more states and cities to pass “source of income” or “source of financing” anti-discrimination statutes and enforce them to protect homebuyers.

These anti-discrimination statutes make it illegal to refuse to rent, sell or lease housing because of a lawful source of income being provided.

The authors suggest a two-fold recommendation — that more states and local municipalities pass “source of income” legislation so that tenants and homebuyers will be better protected; and for the U.S. Department of Housing and Urban Development (HUD), state attorneys general and fair housing organizations to start applying this legal framework to homebuyers

FHA loans accounted for 15.6% of the U.S. mortgage market in 2023, up from 14.3% in 2022, according to HUD. Because FHA accepts lower credit scores, higher debt-to-income ratios and lower down payments than most conventional mortgages, first-time buyers have relied on them due to the ongoing affordability challenges in today’s housing market from elevated prices and mortgage rates.

The FHA should critically evaluate and simplify inspection criteria, review the inspection requirements for FHA appraisals, and modernize criteria wherever possible “to help reduce homebuying hurdles over non-essential, smaller home repair issues,” the authors wrote.

An accessible checklist on the FHA website would give home sellers, buyers, housing counselors, real estate agents and others a reliable source of information, according to the report.

The CFA also called on real estate associations to better educate agents on sources of financing discrimination and how to successfully work with FHA buyers.

Organizations such as the National Association of Realtors (NAR), the National Association of Hispanic Real Estate Professionals (NAHREP) and the National Association of Real Estate Brokers (NAREB) “can help by making source of financing discrimination part of their Code of Ethics and their training of real estate agents on how to fairly communicate housing bids to their sellers,” the authors said.

“In the end, no FHA buyer should be unfairly disadvantaged just because a broker is unfamiliar with this product and fails to adequately educate and inform a home seller.”