Homebuyers and sellers often view things differently when it comes to closing a deal on a property. Whether you are in the process of purchasing a home or selling one, it is important to understand the various types of financing available and what each one looks like from both sides of the table.
Increase your chances of making that house your home by educating yourself on conventional loans and understanding why sellers tend to favor them when choosing between multiple offers.
Length of Time to Close
By and large, conventional loans simply tend to close faster. Less paperwork and fewer stipulations allow these mortgages to be processed more quickly, and many sellers find this to be an attractive bonus. Lending backed by the government, like FHA loans, comes with stringent regulations and can require substantially more documentation. Many times, these extra steps result in extended wait times to sign on the dotted line. Other times, the added steps can derail the sale entirely. Sellers with multiple offers on the table often prefer buyers with conventional financing over alternative options for these reasons.
Perception of Reliability
As explained above, the lengthy and involved process for non-conventional loans results in a lower probability of buyers surviving the race to close. Regulations surrounding government-backed loans can get in the way of the bigger picture and take a particular house or buyer out of the running completely. There is also a perception by sellers that house-hunters utilizing conventional lending have better credit and are thus more reliable than other buyers, as conventional loans tend to require higher credit scores and larger down payments. By securing an approval letter for conventional financing, homebuyers put themselves at an advantage over their competitors.
Lower Chance of Requested Repairs
Because of the stricter requirements of non-conventional loans, many government-backed options mandate certain criteria involving the condition of the property, including even minor items like smoke detectors and peeling paint. These mandates tend to be non-negotiable and sellers are required to correct any issues and make repairs prior to closing. Some sellers do not wish to be burdened with additional home improvements during the stress of a potential move and home sale, so the inflexibility of a non-conventional loan becomes problematic. Private lending does not hold the same rigid qualifications for the house itself, and thus, any issues arising during a home inspection are more easily negotiated.
Less Variance in Appraisal
One final factor to consider when approaching conventional versus non-conventional lending is the appraisal. It has been found that homes appraised under an FHA loan have the potential to appraise lower than those evaluated for a conventional mortgage, and unlike a conventional appraisal, an FHA appraisal takes into account factors beyond current market values. The last thing a seller wants is to have their property appraise for less than asking price, especially half-way through a sale. A higher appraisal is always in the seller’s best interest, and if a conventional loan will bring the biggest value, then a conventional loan is what they are going to favor.
There are plenty of logical reasons to secure a non-conventional mortgage. Countless homebuyers do every day; however, if you are able to find approval under a conventional loan and you are comfortable with the higher down payment requirements, that might be the smoothest road to take. The housing market is still quite competitive and sellers are finding themselves in the driver’s seat, often able to select between multiple offers. If you predict your offer will be one of many sitting in the seller’s hands jockeying for position, take another look at conventional lending options and see if you can’t give yourself a head start.