This is a great question. As a lender, I often write my approval letters and lender letters based on how qualified my clients are. Recently, I have been writing an additional letter explanining why my client has elected to use FHA financing instead of conventional financing even though they can put 15 to 20% down. I can't speak for listing agents, but bank owned properties typically favor conventional financing because of the appraisal issues. FHA has a few more regulations when it comes to credit worthy conditions. The banks realize this and even if there is a better FHA contract, the banks will typically counter and select the conventional offer for this reason. Please don't hesitate to contact me for further information. Good Luck!

Thank you all for your valuable input. Really appreciate it.

I feel that a disparity exists between a Conventional and FHA loan. (this is with a grain of salt). In my case, I lost out to a lower bidder - may be that contract was conventional and mine was not. I feel it is sellers loss to have lost out to a serious buyer with an excellent credit/finance history and no contingencies. The only reason FHA is attractive to me is b'cos of the low down payment.
Is there anything else I can provide to such Sellers other than a bank approval letter and a hefty deposit? What is the hook in such situations?

Sellers like buyers to have conventional financing because:
* If it is a "flipped" house, it can't be purchased again within 91 days of the last sale.
* If it is an "as is" sale like an REO or short sale and has known issues, then it may not pass the safety requirements of the FHA appraisal.
* If FHA appraisal is low it is stuck with the house for 6 months - even if it's a new lender and new buyer.
* Often conventional buyers are putting more cash into the deal and therefore (theoretically) are more easily approved - FHA buyers more often are qualifying by the skin of their teeth. Credit requirements are also tougher for conventional buyers so there's a theory that those buyers have a more established reputation for financial responsibility and therefore are slightly more trustworthy than conventional buyers.

Does this help? I can give better information with more specifics. I assume by the question you're not working with an agent, as a good buyers agent would have educated you on this. I work in Fairfax and would love to assist you. Please contact me if I can help. You can search for homes online via my web site (live updates directly from MLS).

Dear Zaid,

Another scenario where the conventional offer will fair better than an FHA offer is if you are buying a home from an investor who is flipping it. FHA rules do not allow the contract to be ratified until the 91st day from the day the investor purchased the home. If the investor is putting it back on the market after renovations within 90 days when he settled on the home, many times they won't even consider offers with FHA loans. If it is between 90-180 days, FHA will require two appraisals and will take the lower of the two--which makes investors weary of accepting an FHA loan. In most cases, they will prefer the conventional over the FHA.

If FHA is your only route, but you do have some cash on hand--one way to make your offer more attractive is to pay your own closing costs. Here is an example: My seller rejected an offer for 215K asking for 3% closing costs because we both knew the house would not appraise at that price. Instead he took an offer for 185K where the buyer was paying their own closing costs. The house appraised for 184K. The buyer paid for different in the sale price and my client made approximately 8k more with the offer at 184K than he would have made if he would have accepted the offer at 215K.

Bottom line, make sure you work with an agent that understands all these nuisances to give you the best advice based on the type of home you are buying as well as your particular circumstances.

I hope this helps.

Zaid,

In a nutshell, it depends on the

-condition of the property
- type of sale (Bank owned short sale or resale)
- and type of resale (less than 3 m ownership)

Price is not the only factor to win a house with many different types of sales. Highest Priced conventional contracts have been denied because of the appraisal issue!!

Hire someone very wise and consistently active in last few years to represent you so to get a house with least trouble & may be call it a Deal :)

Monika

Hi Zaid,

While it often times doesn't seem fair, a seller may favor the conventional loan over an FHA loan for a couple of reasons.

Typically, a borrower taking out a conventional loan is only financing 80% of the purchase (down payment of 20%) which makes them appear to be a more qualified purchaser. The real reason though is that FHA appraisers are more difficult and more stringent with their appraisal in comparison to their more lenient conventional appraiser counterparts. If the home is in need of some significant repairs, often times the FHA appraiser will want some of these repairs made prior to the loan being made, where the conventional appraiser would not make this demand. If you're the seller, this usually means that you're paying out of pocket to make these repairs.

The other scenario we're seeing playing out these days, is that some buyers are bidding the price up over the list price. While that sounds like it would be attractive to the seller, appraisers (unlike a few years ago when prices were escalating rapidly) want to see comparable sales or substantive justification for the higher sales price. If they don't, the house will appraise for less then the sales price. I don't know if this is what occured in your situation, but if it did, the house may not appraise for the higher sales price and hence the deal will either fall apart, or have to be renegotiated. This normally will not be known until 2 - 3 weeks after contract ratification, leaving the seller with much uncertainty, and difficulty in making firm plans going forward until the appraisal contingency is removed.

I hope you find this helpful. If you would like to discuss this further, please feel free to contact me, and we can discuss it further.

Regards,
Andy Krumholz, GRI, CDPE
Keller Williams Realty
ajkrumholz@yahoo.com
(703) 599-4755