After years of searching for our first home- My wife and I put in an offer on a home we absolutely loved. We were in a bidding war, and we lost. The most frustrating part? The Sellers accepted an offer for the same exact price from a competing family. Why? How?
A common misconception from Home Buyers is that the highest price always wins. While that certainly helps- There are a number of other factors that Listing Agents consider when presenting offers to the Seller. Yes, the picture of your Dog that you included may help, but the most common influencing factors are the Down Payment and the type of loan you are securing.
From a seller’s standpoint, when considering Down payment, you then get to a priority of
- CASH IS KING. Note- This is coming from a man that sells mortgages for a living. Real Estate Agents are taught to love Cash offers. Cash is certainty. Cash is quick. Speed matters. *Link to article on speed.* It can be frustrating to know that I have seen “Cash” deals that take 30+ days to close, and I’ve funded financed deals in ten days flat. It will take a few years before closing financed deals in 14 days is industry standard. Until then Cash Remains King in the eyes of the Listing Agent. Typically the only way to beat a cash offer is to outbid it.
Beyond Cash, you start to see the next level of loan a Listing Agent wants to see.
- Large Down Payment. 30%+
- Standard Down Payment 20%
- Small Down payment 5-15%.
- Less than 5% down Conforming loans.
- FHA loans.
- Special Financing. (0% Down, Gov’t Assistance Loans Etc. Etc.).
Note – As a Buyer, your interests don’t necessarily align with the seller here. Most Buyers want to put as little down as possible, and for good reason. (More on that here).
Why do Sellers Care about Down Payment? It’s not their money being lent, right?
For one- Appraisal. The Lender always works with the lesser of the appraised value or the sales price. For Example- Home listed at 1 million. Buyers absolutely LOVE the house. BUT- The appraisal comes in at $960,000. So now the question becomes- What kind of offer was accepted? If the borrower had 25% down this is a non issue. Buyer was looking to borrow $750,000. Can still borrow $750,000 with a rather minor adjustment to pricing.
If the borrower had 20% down- $200,000. He can still borrow $800,000 but now $800,000 is not considered to be 20% equity. The lender works with the $960,000 appraisal when calculating value. Loan becomes 83% loan to value. Over 80% brings in the question of mortgage insurance. Even though the cost of Mortgage insurance today is dramatically lower than it was historically (See Here) it may give the buyer some extra trepidation on the purchase.
If the Buyer had 5% down- He has no loan. With a $960,000 Valuation, the lender will only allow the buyer to work with a $912,000 loan. With a Million dollar sales price, this means a $88,000 down payment when initially the buyer only had $50,000 to put down.
FHA Loans– There was a time when Community First Mortgage did a large percentage of our loans as FHA loans. During that time, a perfectly qualified borrower would choose FHA financing because it penciled out as a better deal. For the last decade or so that simply hasn’t been the case. If you have 5% down, strong income and good credit- You choose conventional financing. That means that nearly all of the borrowers who have taken an FHA loan have done so because they have a bad credit score or a high debt-to-income ratio or only 3.5% down… Often the reality is a combination of 2 or three factors. Real Estate Agents who accept FHA loans have seen these factors turn into hurdles… And thus shy away from FHA when possible. (Not to mention the fact that FHA guidelines are more stringent on home appraisals). We expect FHA to cut their financing fee in the next few months, and then FHA loans will get a better rap. But until then- Expect them to be viewed as slightly worse than Conventional.
Special Financing- I have taken special classes in order to offer 100% Home Financing here at Community First Mortgage. That being said- I have personally never funded a 100% Financing deal. In an often competitive California market there is simply no incentive to accept an offer that is 0% down unless there are no other offers on the table. Perhaps as the market softens we will start to see these down payment assistance and loan forgiveness programs make their way into the mainstream. But for now, they remain largely in place to meet new Real Estate Agents and to meet Homebuyers exploring all options.
What can you do to give yourself the best chance of your offer being accepted?
- Work with a lender that has a 5-star reputation on Yelp and Google. Preferably a lender in the State you are buying. Pretty straightforward but a lender in Ventura California doesn’t want to be calling Wichita at 4PM on a Friday and the bank is closed.
- Be in a position to write your offer for 3 weeks or less and have your loan officer calling the Listing Agent as the offer is submitted.
- Get Pre-Approved before you find the home you love. Can’t stress this enough. For a quick overview of the Pre-approval process at Community First Click here.