More home buyers are turning to this type of mortgage in an unaffordable market - but sometimes it works against them

By Aarthi Swaminathan

FHA loans have become increasingly popular, but some sellers are wary of offers from buyers with these mortgages

Home buyers have been shut out of the housing market because they can't afford a house. Some are also facing barriers because of their choice of mortgage.

When Andrea and Colin Johnson started looking at homes to buy in Milwaukee, the last thing they expected was to get pushback from sellers about the type of mortgage they had.

After living with their parents for a few years, the couple got married in 2023 and started looking for their own place. They hired a real-estate agent in February 2025 with an eye on houses priced around $400,000.

As first-time buyers, the Johnsons choose a mortgage backed by the Federal Housing Administration, a government agency within the U.S. Department of Housing and Urban Development that insures home loans for lenders.

FHA loans allow buyers with lower credit scores to put down only 3.5% of a home's purchase price, much less than the 10% typically required for a conventional mortgage from a private lender. FHA loans also usually have lower mortgage rates. As a result, these loans have become increasingly popular as the housing market has grown less affordable because of high home prices and mortgage rates.

The government first launched FHA loans during the Great Depression to encourage Americans to buy homes. Home buyers usually opt for them instead of a conventional mortgage because they allow smaller down payments. In some cases, buyers may use one because they don't qualify for a conventional mortgage. Even though FHA loans offer more generous terms, they're open to borrowers at all income levels.

Still, the loans carry a stigma, in part because sellers view the more generous terms as a sign buyers may struggle to repay and also because the FHA places more requirements on the sale. It's legal for home sellers to reject buyers because they have an FHA loan.

For the Johnsons, instead of providing a gateway to homeownership, the FHA loan soon became a problem.

In addition to being outbid when they put offers on some properties in Milwaukee's still-hot market, the young couple faced sellers who said they did not accept their offer because they had an FHA loan, Alex Derenne, the couple's real-estate agent, told MarketWatch.

"They would write fantastic offers and beautiful, heartfelt letters to the sellers, saying how much they loved and would care for these homes," Derenne, who works as an agent with The Real brokerage, said. Yet the couple kept losing out to rival buyers.

The Johnsons' experience isn't unique. Some home sellers are reluctant to work with buyers who have FHA loans, and will even reject otherwise qualified buyers simply because they have that type of loan, industry veterans told MarketWatch.

Research has shown that FHA buyers have been intentionally excluded from the housing market in the past. What's surprising is that the bias against FHA borrowers has persisted even in today's buyer's market, when desperate sellers are offering discounts and other incentives to close the deal.

Why home sellers can be wary of buyers with FHA loans

Real-estate agents say home sellers perceive FHA loans as a headache to deal with, in part because the loans come with certain requirements.

An appraiser approved by the federal government must conduct an appraisal to assess the property's market value and make a minor inspection for safety and soundness before the agency can approve the loan.

Buyers with conventional loans, on the other hand, can waive these contingencies, which they often do as a way to make their offer more attractive to the seller.

FHA loans also carry a stigma because some sellers assume FHA borrowers are financially worse off than borrowers with conventional loans, Mike Steele, a mortgage-loan officer in southwest Florida, told MarketWatch.

"People think you're less qualified because of lower down payments, or that you may have credit issues, or because you have a high debt-to-income ratio," he said. "But really, these loans are no different than a conventional loan."

More buyers are turning to FHA loans in the current market

The share of mortgages that are FHA-backed grew from 15% in 2022 to 18% in 2025 thus far, according to data from Intercontinental Exchange. It's no coincidence that buyers were coping with fast-rising home prices and mortgage rates shooting up to over 7% during that period.

As buyers continue to struggle with affordability, interest in FHA loans is expected to remain strong. In a speech presenting a forecast for 2026, Joel Kan, deputy chief economist at the Mortgage Bankers Association, said mortgage-loan borrowers have "increasingly shifted to ... FHA loans to manage [housing] affordability challenges."

In the first week of December, the number of applications for a conventional mortgage fell from the previous week, but FHA applications rose by 5%, Kan said, "as prospective home buyers continue to seek lower down payment loans."

But buyers with FHA loans sometimes face flat-out rejection, and some sellers state upfront that they won't do business with FHA buyers.

"Absolutely no FHA buyers," one for-sale listing for a house in Norristown, Pa., stated.

"No FHA or VA," said one listing for a three-bedroom home in Owasso, Okla.

"Conventional and VA loans only. No FHA loans on this home," said the listing for a three-bed single-family home in Detroit.

How common is it for sellers to reject buyers because they have an FHA loan? This is difficult to track. Listing agents typically collect buyers' offers and present them to the seller, who then decides which one to accept. Sellers are legally allowed to refuse an offer if they have concerns about the financial risk or the complexity of the loan - so the seller has the right to refuse an FHA loan, according to Sharon Cornelissen, director of housing at the consumer-advocacy group Consumer Federation of America.

In the early- to mid-2000s housing boom, about half of for-sale listings stated that the seller would not accept FHA buyers, according to a 2024 paper circulated by the Philadelphia Fed. The authors analyzed for-sale listings from 2001 to 2021 to see how many excluded FHA as a form of acceptable financing.

FHA loans were less common before the Great Recession, when "there were a lot of alternative financing options available" for people who had trouble getting a mortgage, Sonia Gilbukh, a real-estate professor at CUNY Baruch College and a co-author of the paper, told MarketWatch. These alternative, private-label lending options also helped fuel the housing bubble and subprime mortgage crisis.

In the subsequent bust, the share of for-sale listings that accepted FHA loans grew to 80%, the authors found. That was partly because the private-credit market dried up, so the "only real other option was FHA," Gilbukh said, and also because buyers were scarce.

FHA mortgages subsequently became more common and accepted. Corresponding data from that period from ICE shows that the share of FHA mortgages used to purchase a home jumped from 4.6% in 2006 to 41% in 2010.

In spite of FHA loans becoming more widely used, over the last 10 years that she's been a real-estate agent, "the FHA stigma has always been there," Michelle Vega told MarketWatch. Most of her buyers have used FHA financing, she said.

"The pandemic made these agents feel even more entitled to say we're not going to accept [FHA financing]," added Vega, who works with eXp Realty in North Carolina's Raleigh-Durham area. Home sales were brisk during the COVID era as people relocated and embraced remote work.

And that sentiment hasn't really changed, in her experience. Vega said she has lost offers recently because listing agents believed the home would probably not qualify for FHA financing.

To be sure, some homeowners could be upfront about their preference for non-FHA loans because they expect the property to not pass an FHA appraisal if the home is very old or dilapidated.

But other sellers' agents have told her that "your client had a harder time qualifying for the loan" or that "FHA loans are for people that have less means to buy a house." That is not entirely true, however: People with high incomes can also qualify for FHA loans, and they aren't restricted to people under certain income levels.

"The comments have been absolutely ridiculous," Vega noted.

Some states have antidiscrimination laws that prohibit landlords from rejecting tenants because of the source of their income - for example, tenants who use government assistance to pay for their housing.

Cornelissen, of the Consumer Federation of America, says these laws should be expanded to fight discrimination against FHA borrowers. Cornelissen interviewed buyers, lenders and real-estate agents in the Boston area and co-authored a 2024 report on challenges faced by FHA buyers.

The result of sellers' bias against FHA loans is that even though the FHA program was "designed to level the playing field, we found that many FHA buyers unfairly lose out when competing to buy a home," Cornelissen wrote in a 2024 blog post.

She suggested that state attorneys general should prosecute real-estate agents whose listings consistently exclude FHA borrowers.

"This problem not only hurts individual consumers: It is tilting opportunity towards wealthier buyers and investors with cash," Cornelissen added.

How home buyers can get around FHA stigma

If you're a house hunter looking to buy a home with an FHA loan, there are two key things to keep in mind when dealing with sellers who prefer non-FHA loans.

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