First-time buyers in the Washington region face several challenges. First, home prices, at a regional median of $470,000 in July, are steep for buyers without a house to sell for a substantial down payment. Second, according to data from Bright MLS, the number of homes for sale in the area declined 18 percent in July compared to July 2018 and is well below the five-year average of homes for sale.
The persistent issues of price and inventory mean that first-time buyers often must compete with other buyers and with investors for a well-priced home in a desirable neighborhood. Investors sometimes have cash to pay for the entire property or at least have a down payment of 20 or 25 percent. The perception among many sellers and real estate agents is that a cash offer is best since no one needs to be concerned about financing failing to come through before the closing. After that, if there are multiple offers with various financing options, listing agents and sellers often view a purchase contract accompanied by a larger earnest money deposit or the promise of a bigger down payment as an indication of the prospective buyers’ financial security and willingness to have more skin in the game.
Low down payment loans and competing for housing
For first-time buyers and members of the military or veterans, popular loan options include FHA loans and VA loans. All these loans solve the dilemma that many millennials and other first-time buyers face: a lack of cash for a large down payment. Yet these loans sometimes make it more difficult for these buyers to compete.
Some sellers and listing agents are particularly biased against purchase offers with an FHA loan or a VA loan, often because of an incorrect perception that these loans could delay the final closing. For some agents, a bad experience with a VA or FHA loan in the distant past has left them generally averse to these loans.
The reality is that both FHA and conventional loans close in an average of 45 days, according to data from Ellie Mae’s Origination Insight Report in June. VA loans take about the same, an average of 48 days.
While VA loans have a zero down payment option and FHA loans require only 3.5 percent as a down payment, both loans have a condition appraisal feature because they are government-insured loans. In addition to an evaluation of the home’s value, an appraiser will also check to see that the property meets basic safety and health standards for occupancy such as working windows and doors and functional appliances. Those inspections cannot be waived by the borrower. However, they are not the equivalent of a home inspection. If a property doesn’t pass, the purchasers will need to ask the sellers to make repairs or perhaps even pay for the repairs for themselves. In very rare cases they may need to obtain different financing, If the house is a real fixer-upper, an FHA 203(k) loan, which wraps renovation costs into the mortgage, could be a solution.
Condo buyers and financing
Both VA and FHA loans for condos require that the building be approved for condo financing in addition to the borrower. The FHA recently announced looser guidelines for condos that will make it easier for FHA financing to be approved more quickly even in buildings that are not currently on the list of condos eligible for FHA financing.
Borrowers who want to use VA financing for a condo may need to build in a little extra time for the loan unless they’re purchasing in a building already designated as eligible for VA financing.
Strengthening an offer
In a competitive market, buyers who want to use VA and FHA financing should work with a lender who fully approves their loan before they make an offer and will provide a letter for sellers that emphasizes the financial qualifications of the buyers. This is not a “pre-qual” from the loan officer, but a full “preapproval” from an underwriter. In addition, a buyer’s agent who is willing to advocate for purchasers using this type of financing can be helpful.
Increasing the deposit, if possible, can often make an offer more appealing to sellers. Writing a letter to the sellers about how much you love their home can sometimes help, too, although these “love letters” do not always make it to the seller.
For VA loans in particular, it’s important to remember that the loan program is a benefit available to people who have served our country and deserve the chance to take advantage of hard-earned financial assistance.
Jon Coile, chairman of Rockville-based multiple-listing service Bright MLS (formerly MRIS), writes occasional commentary on the Washington area housing market.