We’re in a competitive market right now and buyers are getting desperate.
They’re up against multiple offers, with variant levels of risky conditions.
- Buyers waiving contingencies
- Buyers making earnest money non-refundable
- Buyers are paying cash more than ever
- Buyers are waiving inspections or accepting the property as-is without question to condition
- Buyers are waiving the appraisal contingency, or offering to guarantee value with an appraisal gap assurance.
- Buyers are offering well over asking price, without concern to the value or condition.
So, how can you compete in a market that is so competitive and risky?
Some buyers are choosing to make fraudulent offers, by making promises that they do not intend to keep.
Type of financing is a BIG deal!
This is one of the most popular, strongest finance offers out there. The type of loan is typically ideal for buyers that have a larger down payment and good credit.
This type of financing tells the seller many things.
- The buyer has money in the bank, they aren’t going to nickel and dime them when it comes time to ask for repairs.
- They’re responsible. They’ve saved money up to buy a home without mortgage insurance, or with a long term mortgage that will drop the insurance at some point, meaning… they are planners… thinkers… savvy homeowners.
- They likely aren’t buying a home for the first time, since most first time home buyers use another type of financing… so the seller may feel assured that the buyer is walking in to home ownership, prepared to take on the Honey Do list, the bills, the maintenance etc.
Basically, this loan says a lot about the strength of the buyer. But it also says a lot about the strength of the lending.
A conventional loan is not a government backed loan, with all the hurdles that may come with that, so there is less likely going to be hoops that the seller needs to jump through, like there would be with FHA or VA.
With credit being a factor in a conventional loan, the loan is based on a strong borrower, and is less likely to face hurdles or delays in underwriting.
With a larger down payment, many conventional loans are finding that appraisal waivers are being approved. This typically happens when the automated underwriting scenario shows that the value of the loan is less than 75% of the homes estimated value. (that’s a story for another day)
This is a government backed loan, with a lower down payment option of only 3.5%, lower credit score requirements and higher debt to income ratios.
So what does that say to the seller?
- The buyer has very little money, if any extra… Since conventional loans can be as low as 5% down (or 3% for first time buyers), it tells the seller that the buyer may not have extra funds to make any needed repairs after they purchase the home. When it comes time to ask for repairs, they may ask for more items, adding more cost to the seller to follow through with the sale.
- The buyer may have lower credit… which is typically faced with the judgement of “they aren’t responsible in life or with money”. Sure, maybe that’s an unfair assessment… but it’s an assumption that may be made.
- The buyer may be pushing their limits, with a higher debt to income ratio. Again, this speaks more towards how responsible they are, affecting their preparedness of owning a used home or the expenses that it entails.
An FHA loan has it’s stigma on the buyer, that’s for sure. But there are other issues with an FHA loan that the seller may not be willing or able to deal with, and in some cases, it may be better for you to get ahead of those.
- FHA appraisals stay with the property for 120 days. While every appraisal is based on an educated “Opinion” of value, no 2 appraisals are ever the same. If a seller selects to go with an FHA buyer up front, they are faced with dealing with the results of that FHA appraisal as well. If the buyer falls through for any reason, they may have lost out on their competitive edge, and may have to deal with another FHA buyer picking up the home the second time on the market. If the original appraisal was low… that’s the most they can try for with the second FHA buyer, unless they’re willing to come in with extra cash over the value.
- On the topic of FHA appraisals… these appraisals work more like a semi inspection, unlike the traditional conventional appraisal. That means that the inspector is going to turn on lights, appliances and heaters. They will check the condition of the paint, the homes roof and even the pool, if applicable. All of these things will affect conditional value, and may end up with a “Subject to” valuation. This means that the home will need certain repairs in order to get final loan approval and close.
- In some cases, health and safety concerns will come in to play and may affect the homes ability to qualify for FHA Lending. The home should have a functional roof, with more than 2 years of life in it. It should be safe, with no empty pool, working gas appliances (turned on), and no hazzards, like peeling paint on homes older than 1978 or evidence of mold and asbestos. The home also needs to have a heat source, and in some cases may require a swamp cooler or air conditioning unit that can maintain temps within 20 degrees of outside.
So what about VA Financing?
VA financing is much like an FHA loan, and all of the requirements of lending… With a Zero down payment, some stigma may come with the buyers ability to financially maintain a home, but in most cases, sellers are savvy enough to know that a VA buyer is simply taking advantage of a benefit allowed to them to get a zero down loan without mortgage insurance. Sellers who are not educated on this, should be!
VA appraisals are much like FHA appraisals, except that the result only stays with THAT buyer on THAT home for 180 days. Meaning, if it doesn’t appraise, the seller can still try again for a higher price.
VA Appraisers are a rarity though… and they must be certified to do VA appraisals. An FHA appraisal has many of the same requirements in safety and condition, but or Government has opted to ensure that a VA borrower is especially taken care of, and the safety and condition of the home is most crucial. Therefore, any condition that may have escaped the scrutiny of an FHA appraisal, won’t fly with a VA appraiser.
- Bars on the windows
- Cracks (trip hazzards) in the walkways
- Missing Flooring (not liveable)
- Cat door in the garage door (broken fire barrier)
- Empty pool
- Bad roof
- Non working water heater or stove
- Lead based paint concerns (chips in paint) Asbestos or mold (safety)
Any of these things while applicable with most FHA and VA loans, they will especially be called out in a VA appraisal.
The difference is, in a VA appraisal, the Government does not want the buyer to miss out on their dream home in case the appraiser may have missed something… so in the case of a potentially low value, the appraiser is to give notice of that low value, called Tidewater, and give the parties the ability to supply further comparative homes in hopes of raising value. This can be a blessing, or a curse.
The type of financing can play a big part in deciding which offer to take.
So, what happens when a buyer offers to buy a home, under the guise of a conventional loan or cash… and then changes to FHA or VA?
One of the biggest issues with this is the FHA/VA Amendatory Clause, required by the lender in every FHA or VA financed deal.
The FHA/VA Amendatory Clause states that the buyer is not to lose their earnest money, in the even that the home does not appraise for at least the purchase price.
Both parties of the sale (buyer and seller) are required to sign this FHA/VA Amendatory Clause, and the lender must have that in their file, in order to obtain final approval on the loan.
According to section 2k of the Arizona Purchase Contract, the buyer may make changes to their lending without consent from the seller, IF there will be no adverse affect to the seller, it will not affect the close of escrow, and it won’t affect the buyers ability to obtain loan approval without prior to docs conditions.
In the case of the FHA/VA Amendatory Clause, the buyer will not be able to obtain final approval, without having the buyer and seller agree, by signing this document, that the buyer will not lose their earnest money under any condition, if the home does not appraise.
What if the buyer waived the Appraisal Contingency with their offer?
This is where we are seeing many bait and switch action.
Buyers are offering on homes, promising to waive the Appraisal Contingency or volunteering to let the earnest money be non-refundable, however, after contract acceptance, they are changing financing, to FHA or VA… in which these promises cannot be kept.
While this change may not affect the buyers ability to qualify…
it may affect the homes ability to qualify for the agreed price.
It may affect the buyers ability to obtain approval without prior to docs conditions… unless the seller agrees to this new FHA/VA Amendatory Clause. Which then over rides the buyers promises to waive the Appraisal Contingency and the Earnest Money being non-refundable.
So, how can you prevent this?
A listing agent should be watching out for red flags in the offer, such as;
- Low down payments
- Extremely high down payments
- Or Missing information on the Prequalification or missing Prequals
Your listing agent should be contacting the lender to ensure that the buyer is a solid buyer and has good faith intent to follow through with the loan as described on the purchase contract.
If the down payment is especially large, or there are big promises, such as an Escalation Clause, the listing agent should be asking for a proof of funds, to show that the buyer is capable of putting down such monies. In some cases, a buyer may be intending to utilize funds from a 401k, however… during the loan process, they may decide not to take that money out and switch the loan program instead. The buyer may be getting a gift from a relative, however… that may change depending on the gift givers situation.
In any case, the listing agent should be asking the questions to qualify the buyer, the lender, and both of their intentions to follow through on any big promises, especially when they’re considering multiple offers with competitive buyers. Those first offers are more often the highest and most secure, so don’t take unnecessary chances.