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November 17, 2008

Financing a Bank Owned Home - VA, FHA or Conventional? (Less Down = Less Likely)

For the fourth post in my series on Getting Your Offer Accepted on a Bank Owned Home I will look at how the type of financing you choose can impact the success of your offer.

The Type of Financing You Use Can Determine the Success of Your Offer

While it is typically not a matter of choice, the type of financing you use to purchase a bank owned home can have an effect on whether your offer is accepted or not.

Banks prefer that buyers have more money down, rather than less.

They make the assumption that buyers with larger down payments will have a higher likelihood of being able to close and that they will be less likely to back out should small problems arise with the property.

Banks also know that buyers using government backed loans, such as VA or FHA loans, may have repair requirements mandated by the appraiser.

VA Loans and Banks are Like Oil and Water

As I established in previous posts in this series, banks are motivated by the desire to sell their properties in quickest time possible, with the least amount of effort on their part.

The VA financing process acts in direct opposition to the banks motivation in two ways.

The first being that VA loans require sellers to clear all items on a pest report, including dry-rot, infestation, water damage and anything else that has been deemed by the pest inspector to be a future source of problems.

The second being the VA appraisal process, which works relatively slowly and is more like an inspection than just an appraisal of value.

VA appraisers are responsible for reporting on the condition of the properties they inspect and quite often they call for repairs to be made. If the repairs are not made, the loan will not be funded. Even if an appraiser makes a mistake or changes his or her mind, changes to a VA appraisal can only be made by jumping through hoops at the Veterans Administration.

Be aware that you will face a lot of resistance from banks when writing offers financed by VA loans. If you can come up with the down payment, you will have a much easier time getting an offer accepted with an FHA or conventional loan.

FHA Loans are Better than VA Loans, But They Still Create Some Problems

While FHA loans are much less stringent in their requirements than VA loans, they still have minimum condition requirements that can cause issues.

FHA appraisers are usually much quicker at getting their appraisals done than VA appraisers, because they are hired directly by the lender, rather than being assigned by the VA.

FHA appraisers do perform a pseudo inspection on the property. Their main concern during the inspection is safety and structural items. The carpet can be dirty and the walls can need paint, and they won't care. But if there are perceived structural problems with the home or safety issues, they will demand that the issues be fixed before an FHA loan can be made.

The most common item I have seen called by FHA appraisers on bank owned homes is the installation of new lights or caps where lights and fixtures were removed by previous owners and the repair of broken windows. 

A clear pest report is not mandatory for FHA loans, but they will call for repairs if there is bad water damage or dry-rot.

These types of repairs are not unreasonable repairs to request in most sales, but when you are dealing with a bank that wants to do nothing and wants the transaction closed quickly, they can be a major hurdle.

You should be aware going in that banks consider offers backed by an FHA loan to be more risky to accept than conventional or cash offers.

If you adjust your other terms to compensate for this perceived risk, you will still have a decent chance of getting your offer accepted.

That being said, if the house is a complete wreck, getting an FHA or VA offer accepted may be impossible, regardless of your other terms.

Conventional Loans Will Work for All but the Worst Fixers

Conventional, non-government loans are the best option when writing a financed offer for a bank owned home.

Conventional appraisers are concerned mainly with establishing the value of a home and are concerned less with it meeting minimum condition requirements.

As long as the home is in livable condition, repairs will typically not be mandated.

Examples of conditions that might keep a conventional loan from going through are failed septic systems, failed wells, major zoning issues, massive flood or fire damage, etc...

A few missing lights, toilets, cabinets, appliances, etc.., won't typically stop a conventional loan from getting funded.

Even with conventional loans there is a hierarchy of better or worse offers based on the amount being put down.

Holding all other terms constant, a conventional offer with a larger down payment and less financed will be considered stronger than vice versa.

Writing a Conventional Offer With a Large Down Payment is Good, but There are Still Other Things to Consider

While writing an offer financed by a conventional loan with a large down payment, with a strong price, a quick close, and a large deposit will put you far ahead of most other offers, there are a number of other terms that need to be dialed in.

As this series continues, I will cover many of those other terms.

The next post in this series will be posted later this week, and it will be titled "All Cash Offers - Prove You Have It or It is Assumed That You Don't"

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Rob Saxe Says:

Great headline, wish I had thought of that.
Rob

Patrick Hake Says:

Thanks Rob,

I typically write titles with the search engines in mind, but lately I have decided to break that mold and go for the "hook".

I'm glad to see another blogger in Sacramento.

I hope it brings you success.

It has definately helped me reach out to the public and has helped me organize things that were already floating around in my head.

Pat

Mark Says:

This article really help me with my situation. I'm shopping for a loan. I qualify for both conventional and FHA. I really want this house and your article has help me with my decision to choose the convention loan.

Thanks.
Mark

Patrick Hake Says:

I'm glad it helped Mark.

Good luck in your home search,

-Patrick

Mic Says:

So I attempted to buy a house with a conventional loan 10% down.
The carpet needed replaced, it needed painted inside, the air conditioner slab needed replaced, and part of the dinning room floor slab had sunk 3/4 of an inch. It deemed safe and fine by a structural engineer (gutters had been replaced to meet his demands).
But we are buying the home with a conventional loan at a price under the appraised value of the home.

Sadly, the bank returned and said they could not do the loan because the carpet was in 'fair' condition and could be a safety hazard. They said we could only do it if we put 20% down. We did.
The bank came back again and said they could now only do it if we put an additional $3500 in a holding account to make sure the repairs were completed.

After months of dealing with the bank we decided to walk away and do through another bank. The second bank seems to be going much better. The bad carpet and paint are not red flags for them.

My question is, "Is the first bank discriminating against us? The home is not very expensive, and they seem to be blocking the loan every step of the way for weird reasons. This is not an FHA loan, but a conventional one, I do not understand why we cannot buy a home that is in decent condition, under the appraised value, with a conventional loan at 20% down."

Patrick Hake Says:

Hello Mic,

I can't say whether this is discrimination or not, but I think you did the right thing by switching lenders. It has been my experience too, that some institutions create their own laundry list of requirements. As long as they are consistent and it is not based on some type of geographic "red lining", I'm pretty sure they can set up their underwriting rules as they see fit. I hope you have better luck with the other lender. - Patrick

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