Bidding wars are common in this hot market. As buyers look to make their offers appealing to sellers, it is important to understand the impact that the type of loan noted in your pre-approval letter may have on offer acceptance. In some cases, your loan program can put you at a disadvantage compared to competing buyers. Here’s a look at why that is the case.
Important Aspects of Pre-approval Letters
Pre-approval letters are a must when it comes to submitting an offer. Sellers want to know that you are at least pre-approved for a loan based on your credit score, income, and debts. After all, they will be taking their home off the market for you, during which time they may miss out on other ready, willing, and able buyers. It’s not enough that you simply have a pre-approval letter. Sellers will review those letters in detail, evaluating certain factors.
The first factor is the mortgage company. The specific mortgage company that a buyer will use is important given that some companies simply have a better reputation than others. For example, some lenders are known for taking a long time to process loans whereas others are known for being quick and efficient. Why is this important? Sellers will be taking their home off the market for several weeks while a buyer works towards getting a mortgage commitment. Working with a good lender facilitates that process and improves the chances of a timely and positive outcome.
Loan to purchase price ratios are anothe consideration. Buyers with higher down payments are more appealing than those with low or no-down payment since it’s seen as a reflection of their financial status and ability. For example, if one buyer is financing 97% of the purchase price whereas another is financing only 50%, the 50% buyer would be considered a safer bet.
Another factor is the type of loan, such as conventional, FHA, VA, etc. Some loan programs are more stringent than others. For instance, FHA and VA loans require pest inspection reports. Any signs of pest damage may require treatment and/or repair by the seller before closing. Thus, a seller may be more inclined to accept an offer with a conventional pre-approval over FHA or VA, all other things being equal.
What Buyers Should Do Knowing that Loan Type Is Important in Bidding Wars
Loan type is important in bidding wars for all the reasons noted above. You may submit a strong offer with great terms, but may lose out simply because a competing buyer had better financing terms. So, what can you do? First, check with your lender on whether you qualify for more than one mortgage program. If you do, it may make sense to include both pre-approval letters with your offer. This can sometimes give a seller assurance of your ability to obtain approval on a loan. Discuss with your agent and loan officer on how to best position this information given your intention to use the less appealing loan but to keep the other as a backup in case there’s an issue. This may not be necessary under normal market conditions, but a hot market requires creative thinking to get you into a home quickly before prices rise beyond your affordability.