Ten Ways to Win: #1 – Is Conventional Financing on a Mortgage “better” than FHA or VA financing?

Columbus, Ohio is experiencing a severe single family home shortage. In some areas and price ranges there can be as many as 15-20 potential buyers for every home on the market.  For homeowners, this imbalance is like winning The Lottery.  For those wanting to purchase a home it can feel like the television show “The Bachelor.”  Buyers put their best offer forward and go home without a rose.  Again, and again.

One piece of advice given out to potential buyers by real estate professionals (including this one) is to do your best to get pre-approved for conventional mortgage financing as opposed to FHA or VA financing.  Many a sensible buyer has asked “Why? Money is money at the closing table no matter how it got there.”  The argument makes sense.  And it’s an argument that makes sense to a homeowner looking at one offer.  But what happens when a homeowner has 6 or 8 or ten offers ~  which is not unusual in this market?  Homeowners often bypass VA or FHA financing in favor of conventional or cash.  Why?  Here is what I tell homeowners.  I will test my argument against one of the best loan officers in Central Ohio:

In the absence of additional qualifying data, choosing a buyer for my home from multiple offers is much like internet dating: decisions must be made on perception when the reality may not at all reflect that first impression.  As an FHA or VA Buyer, how are you being perceived?

FHA and VA loan programs allow the purchaser to have a) less money as a down payment, as low as 3.75% for FHA or 0% for VA b) lower credit scores, as low as 640-660, c) to take advantage of $0 down payment programs which fall under the umbrella of FHA, and d) to have a higher percentage of debt relative to their gross monthly income. (Often called “debt-to-income” or DTI.)  While this widens the net for potential Buyers it widens skepticism of the person holding the rose: The Seller.  True or not:  The seller could interpret this as a Buyer with little savings, less reliable credit and no “skin” in the game.  In addition, there is an outdated notion that FHA and VA loans take longer, are more complicated and because they involve the Federal Government, have potential to get bogged in bureaucracy.  Throw that onto a pile of offers sitting on the dining table of the homeowner: true or not, you just lost to a Conventional Mortgage Buyer.

Is the conventional buyer always better?  While there are 3% down payment options for the conventional Borrower, most have 5% or more down payment, conventional mortgages require a minimum credit score of 620 and a lower debt to income ratio, and the most boastful of lenders claims a contract to close time of 15 days or less.   All of this translates to the Seller as a ‘better’ buyer i.e., a buyer most qualified to get to closing on the contract terms agreed upon.

David Arocho is Team Leader of the Arocho Team and a Branch Manager with NFM Lending.  Arocho and his staff closed over 440 loans in 2020 and is considered one of the top loan officers in Central Ohio. I asked David to “weigh in” on common perceptions. Says Arocho: “FHA doesn’t mean a lesser quality buyer and Veterans who use their VA benefits rarely have no money or questionable credit.  The vast majority of Veterans come in with very high credit scores but want the benefit of the lowest interest rate, no PMI and $0 downpayment required.  In many cases, the Veteran is just as strong as the Conventional buyer.”

How does a Buyer combat this?  First, is the perception true? Do you have little savings beyond the required down payment, a lower credit score and a high DTI?  If so, the harsh truth is that it is going to be difficult to purchase a home in the wildly competitive Central Ohio market.  It’s a challenge for lenders as well, Arocho says sometimes a Conventional mortgage just isn’t a long-term “fit” for the buyer. “As a lender, I am challenged to put an FHA buyer into a Conventional mortgage product when their payment goes up $100-150 a month with a higher interest rate and private mortgage insurance.  It’s just not a ‘win win.’”

So, how does a Buyer change the often-erroneous perception?  Many buyers will write what I call “Queen for a Day” letters.  If you don’t know what Queen for a Day is, Google it.  Instead of writing a fawning letter to the homeowner which screams “choose me!” (which we can no longer legally deliver, BTW, but that’s another blog) ask your loan office to add some “love” to your preapproval letter:  How long have you been in your job? How much money are you putting down?  What IS your credit score – (if it’s good,) and how solid are you as a borrower?   How quickly can your loan realistically close and is there any cause for delay concerns? With this kind of help and a competitive offer, your offer could rise to the top. Is a good loan officer willing to help with this kind of letter? “Yes, we sure can!” Says Arocho “Some Realtors like me to note how much down payment the Buyer has or indicate buyer can pay any difference between the appraised value and offered purchase price. I can do that – or anything else the Buyer gives me permission to share.”

This blog is written by Kathy Chiero.  Kathy is the Team Lead for The Kathy Chiero Group of Keller Williams Greater Columbus Realtors.  Thinking of Buying or Selling?  Find us www.OurOhioHome.com © 2021 All rights reserved.