Can't Find an Affordable FHA-Approved Home? You Have Options

Americans took out nearly 150 billion in loans backed by the Federal Housing Administration to buy homes in 2018. Nearly 83% of those FHA borrowers were first-time home buyers, according to the Department of Housing and Urban Development.

It's unsurprising that FHA loans are especially popular with first-time home buyers, due to more lenient credit score and debt-to-income (DTI) requirements. With scores of buyers searching for affordable entry-level housing, finding a place to call home can be a struggle.

In pricier markets, even the FHAs 3.5% down payment option might bust your budget. Houses that have a low asking price, but need TLC, may not pass an FHA appraisal. In highly competitive markets, it can be difficult to make an offer that gives you an edge on other home buyers.

What is an FHA buyer to do? Here are a few different options.

Priced Out? Look at FHA-Approved Condos

If an FHA-approved single-family house would push your budget past its breaking point, consider making your starter home a condo.

As of October 2019, borrowers can get FHA loans for individual condo units without having to worry about whether the entire complex is FHA approved. John Graff, CEO of Los Angeles-based Ashby & Graff Real Estate, said via email that this change should increase the inventory of FHA-approved condos, offering a broader selection of affordable homes.

You'll want to budget for a condo's homeowner association fees as well as property taxes. Generally speaking though, opening up your search to include condos should bring you lower-priced options.

Found a Fixer-Upper? Get an FHA 203(k) Loan

In markets with older housing stocked, passing an FHA appraisal could be a bigger obstacle than cost. Listing photos that make a low-priced house look like a charming fixer-upper can conceal major issues, Corning, New York, real estate agent Jennifer M. Baker noted in an email.

An appraisers key objective is to ensure the property is a sound investment for your lender. An FHA appraisal isn't just about value. To be eligible for an FHA loan, the home must also meet the FHA's minimum property requirements by being safe, sound and secure.

If you see potential in a house that won't pass an FHA appraisal, an FHA 203(k) loan could help you afford the needed work. It has similar requirements to a typical FHA home loan, but the costs of renovating the property are rolled into the total mortgage amount. Based on the appraisal and an estimate of the home's value once the renovation is complete. Using a 203(k) might mean living in a rental a little bit longer -- costs you can include in your new home loan -- or in a construction zone. Either way, you're turning a house into your home.

Facing Stiff Competition? Be Flexible

There are affordable homes out there, but with many buyers competing for them, it's a sellers market.

Though you can use strategies to make your offer more attractive -- like being flexible on the closing date -- you may also be able to find more options by changing your home search criteria. When working with a Realtor, be sure to discuss all of y'all's strategical options.

An experienced buyer's agent can help you weigh possible trade-offs of different strategies and supply insight into your local market.

You may not get the first home you submit an offer for -- or even the fifth -- but keep looking. There is a home out there for everyone!