Are Offers with FHA Loans Competitive?

Question

Wes Blackwell · Answer

Meredith L.

Here is the order of financing preference from a seller's perspective. And if not from the seller's perspective then certainly the listing agent's. Here's how I would explain each financing option to my seller as their agent:

• Cash -- Cash is king. An all-cash offer means the offer is not contingent upon the buyer getting a loan, and often times not contingent upon an appraisal, so the buyer can easily pay above appraisal value in a competitive market. It also usually means we'll have a quicker escrow and a faster close. And when it comes down to it, that's what seller's want... a faster sale at a higher price. This offer will almost always win by default.
• Conventional -- 2nd best option. Just like @Russell Brazil stated above, a conventional loan usually indicates that the buyer is more qualified than an FHA buyer, and so the loan is more likely to close. If a conventional offer and a FHA offer have the same terms, I would recommend that the seller choose the conventional offer simply because it has a higher chance of closing and going all the way through escrow.
• FHA or VA -- Least preferred, and sometimes even wrongly looked down upon. I once had a FHA buyer with a 6-month old baby come to my open house who had been trying to get offers accepted since before the baby was born! But they were in the ultra-competitive sub-$200k price range so their story isn't typical. But, they made an offer on my listing, and got beat by someone with all-cash. Sooooo there you have it lol.

Besides the type of financing, another important thing sellers consider is the Offer Price. That's what it all comes down to after all. A higher offer price can even help an FHA or Conventional offer beat an all-cash offer. At that point If I were the listing agent I would explain to the seller that it's possible they may receive more money if the offer contingent upon a loan goes through, but that it's more of a sure thing if they accept the offer that is all-cash. The possibility of a little more vs. the certainty of a little less.

After the type of financing and offer price, the next most important thing is the Down Payment. A higher down payment usually indicates that the buyer is better able to qualify for a loan and close the transaction, and it also means that offer is less likely to fall out because of a low appraisal. As you can see It's really all about what offer has the highest chances of going through. If I advise my seller to accept your offer and you are unable to perform, we have to go back on the market again and may have possibly lost another buyer who would've closed.

Lastly, it's the Other Terms like who pays the transfer tax, who pays the escrow fee, who's paying for a home warranty, etc. These are usually small ticket items and highly negotiable so they don't influence which offer gets accepted that much.

As far as writing a letter, honestly it's not worth it. It's all about financing and purchase price. I've seen clients try it all and it really doesn't make a difference if someone else offers a couple thousand more than you do.

I had one client discover who the seller was on Facebook, and they saw that they were really into church and religion. So my client decided to write some hokey letter pretending to be really into Jesus and said they had been praying for the perfect home and God would finally answer their prayers if the sellers accepted their offer...

Did it work? LOL HELL NO

Usually it just ends up with the buyer feeling super butt-hurt and rejected since they put all the additional effort into writing a letter and trying to make it personal, when for the seller it's all about the money.

Russell Brazil · Answer

Yes an FHA loan, along with VA loans put you at a disadvantage against conventional loan buyers.  If you want to win a bid against those, you are going to need to bid higher than the other individuals. You also need to use some common sense in what your bids are. Bidding like $1,000 more than someone else in most cases is not going to get it done. It has to be a significant amount so that the seller can see the value in taking your offer over someone elses.

FHA loans come with the seller often needing to make repairs to get the sale to go through, as well as the fact that FHA loans have a higher chance of not closing than someone using a conventional loan. They also typically take longer to close, which increases the sellers carrying costs as they may need to hold the property through an additional loan payment.

The median price point in my market hovers around $450-$500k, and usually an FHA borrower will need to go between $5k and $10k higher to get the property.