′ I’ve had a couple of conversations with Eastside home buyers over the last week about what makes a compelling, irresistible offer, and thought I would address one of the most common questions asked:
Why, if a seller nets the same amount, do they care how much a buyer’s downpayment is?
And why is it virtually impossible for a buyer with an FHA/3.5% downpayment loan to win a home these days?
It’s a great question, and a timely one, as first-time buyers scramble to get into the market before mortgage rates spike.
There are a few factors working against FHA buyers, which become especially apparent in a seller’s market like the one we are in today. With lots of offers from which to choose, the low downpayment ones are usually the first to be eliminated, and here’s why:
1) Buyers without a lot of cash on hand are perceived as a riskier loan, and sellers are afraid your loan commitment will fall through.
2) Buyers without a lot of cash on hand cannot typically afford lots of repairs, and sellers are afraid you will cancel if we discover the slightest thing needing work.
3) In the old days (<2005), FHA loans took much longer to close than conventional loans, and sellers do not want to wait any longer than necessary to get their money.
4) And the biggest reason…homes purchased with FHA loans must meet higher standards of “habitability” than do those purchased with conventional loans.
This means that when an FHA appraiser comes out to evaluate the home, he will be noting cracked window panes, peeling paint, the functionality of all utilities, heating system, etc. Any problems noted result in a laundry list of items that must be corrected prior to the loan being approved, and what seller wants to be presented with a list of corrections that need to be made?
When appraising a home for a conventional loan, appraisers are more focused on the value than the condition, and therefore strike much less fear into the hearts of sellers and their agents.
Now I speak from experience when I say that much of the prejudice faced by FHA buyers is unwarranted and unjustified, and that I have had many, many FHA transactions go just as seamlessly as any other transaction.
It is sad that the very loans designed to help low-downpayment buyers have such a stigma, and if given a choice, will be rejected by most sellers out there.
So, what’s an FHA buyer to do in order to compete?
That’s an easy one, though you may not like the answer: write a compelling personal letter, offer to buy the home as-is, and/or offer a too-good-to-pass-up price.
If you can’t compete on the downpayment front, oftentimes you can compete in other creative ways that appeal to a seller. At the end of the day, though, the cold, hard truth is that “cash is king”, and you usually have to be very aggressively generous to compensate for the perceived weakness in our offer.
All home sellers want is an easy transaction that closes without a hitch, and many times it is the first-time buyer who is the most motivated to complete the sale and do everything they can to make it happen.
Here’s hoping that one day soon when the market shifts (and it will), sellers will be clamoring for your attention!
Want to buy a home with an agent who knows how to get your offer accepted in any kind of market? We’d love to help you!
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About Elise Knepper:
Elise Knepper is an award-winning Realtor specializing in gorgeous homes from the Hollywood Hills to Pasadena. With over a decade of experience serving buyers and sellers, she covers the LA real estate market for Examiner.com, loves exploring the city's neighborhoods, historic architecture, and all things design.