Financing matters. There are many ways and means to purchase a home including paying cash. We’re going to deal only with the ways that matter to the home seller and explain why your buyers financing matters to you.
You may be wondering what financing has to do with you? You’re the one selling the home, aren’t you? Not borrowing money to buy it. The financing has quite a bit to do with the sale actually.
The type of financing your buyer is using can directly affect the time it takes and the probability of making it to the closing table. When you go into contract your house is pulled off the market. If for whatever reason the deal falls through the time off the market could affect your selling price. How? Because it gives your house the appearance that the house has been on the market longer than it actually has.
Say for example your house goes up for sale and 6 weeks later you have a contract. At this point your house has been on the market for 6 weeks. The deal is now 3 weeks in, maybe 4, and the bank says your buyer can’t get financing. Could be a number of reasons like job loss, lied on the loan application or just a bad lender. So now the house goes back up for sale and spends more time on the market. To potential buyers your house looks like it has been on the market for 10 weeks rather than just 6.
Now you may be getting into that stage where people start wondering what’s wrong with the house. Why hasn’t it sold?
There’s a saying in the real estate world, “the longer it sits the less it gets.”
Types Of Financing
A conventional loan is a loan between a person or organization and a lender. With conventional financing the loan is not backed or guaranteed by the government. Money is borrowed from a lender and paid back to a lender. If the borrower defaults on the loan the lender gets the hose back and is stuck with it.
Conventional loans generally require more down. The banks like 20% but often will take less and charge the borrower PMI or private mortgage insurance. The theory is the more the borrower has in the deal the less likely they are to default. If they do stop paying back the commitment the mortgage insurance company will take care of it. Why is this important to you? Conventional bowers are usually the strongest buyers, and the easiest loans to get through to closing.
Most conventional borrowers have more skin in the game or money down. Conventional loans usually require higher and better credit scores. Then the idea becomes maybe this borrower is more responsible and less likely to have something “come up” during the loan verification process. You don’t want anything “coming up” during the verification process. That can shut a deal down.
Financing matters and conventional loans are the next best thing to cash.
Government Insured Loans
Government-insured loans are just that. Home loans, or mortgages, that are backed by the government so if a buyer defaults the government insures against losses the lender may incur. There are three types of government-insured financing.
The Federal Housing Administration is the branch of the federal government that manages the (FHA) mortgage insurance program.
FHA loans are available to just about anyone that qualifies with credit and income guidelines. These loans are very popular because they require a relatively small down payment and are easier to get approved for. Borrowers can get into a house with as little as 3.5 percent of the contract price down. Potential buyers can get by with lower credit scores and even in some cases recent bankruptcies or foreclosures on their record.
FHA loans can come in many forms. Often lenders and FHA offer special programs to help people become homeowners. There are first time home buyer programs, bond programs and others. These are all usually FHA.
USDA loans are a 0 down loan that is designed for low-income borrowers. There are a lot of rules as to qualifying income and type and price of the home. Those rules vary from state to state. USDA loans are the most difficult to get and the get to closing. There’s a lot involved including a very difficult appraisal process. (More on that later)
The VA Home Loan Benefit
The US Government created the VA home loan benefit in 1944 to assist service members returning from the war to be able to purchase homes. Since it’s inception the VA home loan has helped over 20 million veterans and their families obtain affordable financing to buy a house.
The veteran can get into a house with $0 down and no PMI.
VA loans are great for qualifying veterans but a little more work for you. It’s great if you want to help a vet by considering his/her offer from the multitude that you’ll get. Keep in mind the VA loan is a lot like FHA with an even a more stringent appraisal process.
The appraiser requirements are mostly like the FHA requirements, but my experience has shown the VA appraisers are a little stricter. More likely to call you out on what they consider defects.
There are some fees that the veteran is not allowed to pay and if they come up are the responsibility of the seller, bank or escrow company. Some of these fees are a processing fee (not to be confused with origination fee), closing fee or the cost of termite inspection.
Remember Veterans have given their time and more serving our country and fighting for the benefits we enjoy living here. Just something to keep in mind when considering a veterans offer.
The Government Appraisal process
What concerns you as the seller for Government-backed loans like FHA and VA is the appraisal process. The government has a Stricter appraisal process that may require repairs to be done to the home.
The home must be in a certain good condition. According to HUD handbook 4150.2 the structure “must be free of all known hazards and adverse conditions that may affect the health and safety of the occupants”.
What Appraisers Look For
Some the things Government trained appraisers look for and how it relates to why your buyers’ financing matters.
- All bedrooms must have egress (a way out) for safety concerns such as fire. A window is OK if it’s large enough for someone to get out.
- In homes built prior to 1978 when lead based paint was banned in the US the appraiser will check for any chipped or peeling paint. Painters must have a specific license to deal with lead-based paint and it is expensive to hire them.
- All steps and stairways should have a handrail. Sometimes if steps are uneven the appraiser will call it out.
- The heating system must work and be sufficient to create comfortable and healthy living conditions.
- The roof must be in good condition and, obviously, keep moisture out of the house. It should have a future too.
- The foundation must be in good repair and able to carry and normal loads imposed on it.
- The lot should be graded to promote positive water flow away from the house to prevent damage.
I have found USDA and Rural loans to be the most difficult to get through. The house must be in really good condition and where I live in Kansas that can be a challenge because the maximum allowable home price is so low. When considering an offer using USDA financing be sure your home is in good shape or negotiate the contract with required repairs in mind.
The three key things to remember what will be watched for any of these Government backed loans are:
- Structurally sound
The following is what I mean by open to interpretation. In the defective conditions section of the FHA handbook it shows how the process leaves you at the appraisers’ mercy. It reads as follows; “Other readily observable conditions that impair the safety, sanitation or structural soundness of the dwelling.”
A property with defective conditions is unacceptable until the defects or conditions have been remedied and the probability of further damage eliminated. That’s a quote from the handbook. Some defective conditions include
- Poor workmanship
- Defective Construction
- Evidence of continuing settlement
- Excessive dampness
- Handrails where needed
This is by no means an exhaustive list but will give you a good idea of what to be ready for.
It’s not just about price when deciding on which offer to accept, and you will get many if you follow my training. The type of financing your potential buyer is using could be the difference between a successful closing or more time on the market.
Now, consider this; You have 3 identical offers except one is conventional, one is FHA and one is VA. Which do you accept? Keeping in mind that service members deserve a break.