Financing Affects STRENGTH of Offers, Acceptance or Rejection!
scottsent August 11th, 2008
What Some Lender’s Forget To
Tell You…
Is that the method of financing you use has a MAJOR impact on home purchase NEGOTIATIONS!
The weaker your financing, the weaker your position, the MORE you have to offer to entice the seller to take a ‘chance’ with you.
Weak financing means you will have a much tougher time negotiating an accepted offer (you will get turned down many times when making offers on homes), and when you do actually get an acceptance, it’s usually well above asking price (much more than you would have had to offer if you had stronger financing lined up).
That’s because the bank seller will only accept a weak financing offer if they believe it’s worth the risk of waiting to see if your loan will actually fund.
They only do this if your offer has the potential to increase their net proceeds SIGNIFICANTLY.
Keep in mind, if the bank seller wastes 2-3 months because the buyer cannot obtain a loan, the property value may have dropped 20-30K for them. This is why bank sellers are skeptical of weak financing offers!
In a market with tightening lending standards, bank sellers become even more cautious!
The order of strength of your offer goes like this:
STRONG
| 100% Cash Offer
| Large Cash Down Payment W/Conventional Loan
| Small Cash Down Payment W/Conventional Loan
| Small Cash Down Payment W/ FHA Loan
| Nehemiah & FHA Loan - Seller pays buyer’s down pymt (Exp Oct 1, 08)
| Sec 203(K) rehabilitation loan
| Seller Financing/Hard Money Loans
WEAK
Lender’s will often tell you that you are ‘Pre-Approved’, but may fail to tell you of the actual STRENGTH of your pre-approval.
In some respects, your pre-approval COULD be virtually WORTHLESS depending on the market!
In a foreclosure market, banks are selling homes AS-IS. That means they don’t want to pay any concessions.
Concessions are cash discounts on the home sellers generally don’t want to pay:
*Nehemiah programs asking the seller to pay your down payment
*Repairs required to fund loan, includes Pest, Vandalism, HVAC, Electrical, etc.
RED FLAGS: Loans that have a high risk to seller -
(the probability of not funding is high)
*FHA Loans (usually require more seller repairs than conventional loans) and take up to 45 days to close, which is much longer than conventional loans.
*Sec 203(K) rehabilitation loans (take longer to close, repair costs may be in excess of appraised value, causing buyer to fall out of escrow)
*Buyer down payment assistance/Grant Programs
*No down payment - tells seller you may not qualify at the last minute
*No Direct Underwriting report with ‘Pre-Approval’ -
A real pre-approval from any broker or financial institution comes with a DU report. Failure to provide this leads sellers to believe you only have a pre-qualification letter, which is significantly weaker than an actual pre-approval.
*Fixer properties - bank sellers prefer selling to all cash buyers or conventional loan based offers. Most ‘fixers’ will not work for FHA loans
*Mold/Mildew/Major Damage/HVAC not working/Broken Windows/Vandalism - Sellers prefer all cash sales.
So, what this means is this: It’s OK if your financing isn’t perfect. However, you must understand the market and appreciate that the weaker your financing, the more the same home will cost you, and the less likely you will be able to compete against other buyers in the market.
If weak financing is unavoidable, plan on:
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Making above asking price offers
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Seeking out less desireable homes (i.e. near major streets, airports, etc..)
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Seeking out homes with Long Days on Market
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Avoiding ‘fixers’ or homes with problems that makes funding a loan questionable
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Having a pre-approval in hand, along with an approval of any special loan programs like grants
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Keep your same job, don’t increase your debt, work same number of hours (major financial changes will break your pre-approval)
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Avoid homes that are new on market or clearly priced under market value
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Below market value homes spark bidding wars, a strategy some sellers use
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Avoid homes with multiple offers. Invariably, there will be a conventional loan offer or a high/all cash offer that will beat yours.
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Don’t EXPECT the seller to counter offer you. On homes with 10-15 offers, the Seller usually only counters the best 2 offers.
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Don’t make unreasonable/frivolous offers on a home with the excuse ‘if the seller doesn’t like it they will counter’ - It’s a known fact they will not counter a frivolous offer if there are better offers on the table.
In Summary: Don’t negotiate aggressively on homes you like when there is short days on market, multiple offers, and you have weak financing. Instead, offer more than asking price, try to do a short close (as per your lender’s processing time frame), and realize you are asking for the seller to throw you a bone and help you get into their home.