Summary
This study examines the effects of FHA and VA mortgage financing on home prices. Using a database of nearly 9,000 homes sales in the San Antonio, Texas area, hedonic analyses reveal that both types of government-backed financing are associated with reductions in selling prices. The results may imply a cost shifting behavior on the part of buyers and an implicit subsidy on the part of sellers. The regressions show that the price discounts for FHA underwriting are about 4% (3.81% to 4.14%) relative to conventional financing. VA discounts, as expected, are smaller, ranging from about 2% to 3.46%. Given the prior literature, the results are likely a result of the fact that FHA and VA homebuyers are able to shift some costs to sellers.
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Fha/Va Financing and Price Discounts
This study examines the effects of FHA and VA mortgage financing on home prices. Borrowers using FHA and VA default protection programs borrow at higher loan-to-value ratios (LVRs) and payment-to-income ratios (PTIs) relative to conventional underwriting standards. Higher LVRs and PTI ratios are offset by the payment of additional financing costs in the form of default insurance premiums and origination fees. Given prior evidence on the existence of the capitalization of various financing costs, there exists the possibility that FHA/VA financed properties will attract price discounts. That is, given that FHA/VA borrowers are required to pay additional financing costs, one could expect that the reservation prices, and ultimately bids, for FHA/VA borrowers, might be lower than for a conventional borrower in an attempt to offset the burden of the additional fees. Sellers, faced with high opportunity costs and a selling process that is typified by a series of sequential bids, may accept what is in fact a low, early bid from a buyer in an attempt...
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