House Hunting? Get the Right Loan

April 25, 2016

Photo credit:  Jordan McCullough-iStock-Thinkstock

You don’t have to live in Colorado to know how crazy the market is around here (especially in Denver), and you might be no stranger to the process of getting a home when inventory is low and demand is high. Buyers often see house after house picked off the market, often times after a day or less of being available.

Step One: get pre-qualified for a mortgage.

Step Two: find a house and put in an offer.

Step Three: Repeat Step Two…over and over and over.

You’ve probably heard the tips: get pre-approved, write a friendly letter, and so on. I agree that these are all great ideas. However, the type of loan you’re qualified for also matters.

It’s not enough to put in a ‘reasonable’ offer. You have to present yourself as the best possible candidate for the seller – and the type of loan you have can be a either an advantage or disadvantage.

Here’s how it breaks down, from my experience buying and selling in Denver:

If you’re a first-time homebuyer with little-to-no cash, you’re looking at an FHA or VA loan.
Federal Housing Administration (FHA) and Department of Veterans Affairs (VA) loans are issued by the government. They are marketed to first-time homebuyers. FHA Loans can get approved for people with credit scores as low as 580 and have a low down payment requirement – usually around 3.5 percent but sometimes as low as $1,000. VA Loans have no down payment at all (but obviously have a military service requirement).

Advantage: These are great loan opportunities for buyers. They work well for folks who want to get into a house and may qualify for down payment assistance or not have, you know, $20,000 lying around.

Be Aware: FHA and VA requirements are potentially difficult for sellers. The inspection qualifications are more rigid, the process takes a bit longer (closer to 45 days), and if anything comes back less than ideal, the loan will be declined unless everything is fixed. Since it’s less likely that the buyer has the funds to cover anything above and beyond the purchase, a seller would need to cover these costs – something they’re not typically inclined to do in this market. Do you qualify for an FHA?

Looking at houses that will require some work? Consider an FHA 203(k) loan.
As I said before, FHA and VA loans have strict inspection/appraisal requirements. Sometimes these are code issues, like an outdated electrical panel. Sometimes, they’re rather petty, like having the appropriate number of stairs off of a deck, or repairing chipped paint (seriously). Since the loan won’t be approved without the requirements being met, and sellers aren’t often willing to pay for them, this often puts buyers with no additional funds in a “catch-22.”

An FHA 203(k) Rehab Loan allows the purchase price and renovation price to be rolled into one cost. There are two types: Standard and Streamline. A Standard 203(k) is for complicated projects like structural work. A Streamline allows for any improvements under $35,000. Neither loan allows the buyer to borrow more than the total value of the house.

Advantage: Buyers who qualify for an FHA typically qualify for a 203(k), and a seller with known issues may be more inclined to consider someone with a 203(k) because they know they won’t have to pony up the cash for fixes. Typically, a house for sale that needs this level of work might scare off other buyers, so you may also have an advantage of fewer bids.

Be Aware: 203(k) loans are incredibly time consuming. Once an offer is accepted, a 203(k) inspector must review the property and a qualified contractor must be approved to complete all of the scheduled work. The inspection, pre-renovation appraisal, and contractor bid must be submitted and approved before closing. This means that closing on a 203(k) loan may take up to 90 days (Streamlines take about 60 days).

For buyer marketability, consider a conventional loan.
Conventional loans are not backed by the government like FHA and VA loans, so the qualifications are much higher. However, the closing process is generally faster and, because the buyer is required to have more cash on hand, it is a more attractive loan to a potential seller.

Advantage: For buyers with excellent credit and a sizeable down payment, conventional loans provide the easiest closing. They have fewer inspection/appraisal hurdles than their government-backed counterparts, and they typically close in around 30 days.

Be Aware: Buyers must have excellent credit (generally 740 or higher) and must have 5 percent down (though some lenders advertise 3 percent works but 20 percent is recommended). There’s also some bargaining room in the inspection/appraisal process because the loan isn’t contingent on either. This means that a buyer might ask a seller for a new roof, but the seller may say no. A conventional loan will still process, whereas an FHA would require that someone pay for a new roof before the loan was approved.

Of course there are a million other things to consider when searching for the perfect mortgage – these are important for you as a buyer, but not to a seller.

If you’re looking for a home in the Denver-Metro area, best of luck to you. It can be done. Get the best loan you can and an agent that will market you (yes, it’s a thing)…or you could always hope for a previously unknown rich uncle to pass away and leave you enough cash to just buy whatever you want.