Sellers Prefer Conventional Mortgages. Here’s What to Do If You Can’t Get One

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It may feel like non-cash buyers are getting squeezed out of today’s housing market. But there are moves you can make to help overcome the odds.
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Just like the animal kingdom, there is a hierarchy to mortgage loans. When it comes to competing home bids, all-cash offers usually come out on top.

When the number of homes for sale isn’t able to meet buyer demand, as is the case in markets all over the country right now, you’ve got a recipe for bidding wars. When you’re bidding against all-cash buyers or conventional loan offers, anyone with a government-backed mortgage — typically used by first-time buyers — could be at a disadvantage. “Those buyers really don’t have a chance, unless a conventional buyer is not there, which almost never happens,” says Scott Sanchez, licensed Realtor with Keller Williams Clients Choice Realty in Colorado Springs. 

That doesn’t mean it’s impossible to buy a home in today’s market if you are unable to pay all cash or qualify for a conventional mortgage. “Everybody reads the headlines and assumes that everything is on fire and everything is flying off the shelves,” says Tamar Asken, CFP and licensed Realtor with Avenue 8, a real estate brokerage in the Los Angeles area. “That can be true, but it’s not true for every property in every situation.” Becoming a homeowner may take a lot more patience and preparation, but you can be proactive and give yourself a leg up on the competition, regardless of your financial circumstances.

If you feel like you’ve been pushed to the sidelines by rising home prices and stiff competition from other buyers, it can be helpful to consider things from the seller’s point of view.

How Sellers View Your Financing 

The reality is that a buyer’s cash position is winning bidding wars, Sanchez says, making it tougher to land a contract on a home. An offer will always look better if you have more money for your down payment, closing costs, or a potential shortfall in the appraisal. 

Pro Tip

After you submit an offer, it could be a good idea to have your lender contact the listing agent to explain your situation and why you’re a great borrower.

When it comes to narrowing down offers that are close in price, the experts we’ve talked to say sellers and real estate agents that influence them typically value finance sources in this order:

  1. All-cash offers are the gold standard because they don’t require any mortgage underwriting process and can close more quickly and reliably. Even though all-cash purchases have increased, they still only represent 30% of home purchases, so the other 70% will be financed with a loan. 
  2. Conventional loans have fewer hoops to jump through and more stringent lending standards compared to government-backed loans. The larger the down payment, the better in the eyes of the lender. 
  3. Government-backed mortgages such as FHA loans, VA loans, or USDA loans typically fall at the bottom of the hierarchy. These types of loans require smaller down payments, typically have more hoops to jump through, and the general perception is that they may require a longer or more difficult closing process. These borrowers also typically have less cash on hand, says Sanchez. 

What to Do If You Can’t Qualify for a Conventional Loan 

There are signs we’ve already hit peak frenzy in the housing market. But don’t expect prices to drop, some experts see home values staying strong, but growing at a slower rate.

The number of unsold homes increased by over 7% in July 2021, according to the National Association of Realtors. “We see inventory beginning to tick up, which will lessen the intensity of multiple offers,” National Association of Realtors chief economist Lawrence Yun said in a statement. Even with the potential for fewer bidding wars, it’s still clearly a seller’s market. The same report showed that home prices grew by nearly 18% in July, year over year.

Even if you don’t have the most desirable financing, experts say these five tips will help you increase your odds of getting an offer accepted:

1. Expand your search criteria

The more homes you look at, the better your chances are that you’ll find a deal that makes sense for you. Single-family detached homes may be in high demand in your area, but you might be able to find a deal on a townhouse or condo. Consider resetting your expectations and expanding your home search beyond the types of properties you were initially interested in. 

You could also look at buying a fixer-upper with a renovation loan, such as an FHA 203(k) loan, that allows you to finance the cost of purchasing and repairing the home in a single loan. Asken sees more interest in homes that are perceived as turn-key ready and believes sellers are taking a big hit for not having a move-in-ready home. So a property that needs some repairs could have less competition and may be more affordable.

2. Consider other areas

Depending on how expensive homes are in your area, it could be worth relocating to somewhere with a lower cost of living. Look for areas where houses aren’t selling as fast or are receiving fewer offers, and you may be able to find a better deal. Putting up with a longer commute could unlock a whole new market where property taxes or real estate prices are much lower.

If you have the flexibility to work from home and don’t need to be near an office, then you could shop for a home anywhere in the country and potentially could buy housing remotely. Some cities will even pay you $10,000+ to move there or could have more lucrative first-time homebuyer assistance programs available. 

Moving your home search from a high-cost area to a low-cost area will also help your savings go further. A 5% down payment on a $400,000 home would turn into a 10% down payment on a $200,000 property, which could reduce your interest rate and get you closer to getting rid of PMI (private mortgage insurance). You could also keep the same down payment percentage and use the leftover cash to cover an appraisal shortfall or keep it for unexpected home repairs.

3. Build your savings and credit score

The Catch-22 with homeownership is that the better your financial situation, the cheaper it will be to borrow money for a home purchase. Your credit score and the size of your down payment factor heavily into the type of loan you can qualify for, as well as the mortgage rate. As your mortgage rate decreases your buying power increases, and with a higher credit score, you have a better chance of qualifying for a conventional loan. 

This approach could mean waiting longer to purchase. Take this time to work on building up your credit score. You can do this by paying your bills on time and paying down your debt. Building up your savings can go a long way to helping you become a homeowner. Find a budget that works for you to help you prioritize saving, such as a zero-based budget. In many cases, putting off buying a home while you improve your financial situation can make homeownership more affordable in the long run.

4. Be prepared to act quickly

Going into your home search, get as much done in advance as you can. “I preach preparation with my clients,” Sanchez says. “Be the most well-prepared buyer. I don’t care what your budget is. That’ll give you a shot.” Know what you must have in a home and what would be nice to have. Get all of your paperwork in order, and be ready to move quickly. 

Figure out your homebuying budget in advance and get preapproved for a loan. Asken recommends even going one step further than a mortgage preapproval. “Have their lender contact the listing agent,” she says. Your lender should make a case for you and explain why you’re a great borrower and how the deal is likely to go through.

5. Don’t overextend yourself

It’s best not to purchase a home at the top end of your budget. It may be tempting to expand your homebuying budget after losing multiple offers. But it’s important to stick to what you can comfortably afford. Your monthly payment isn’t the only expense you’re committing to as a homeowner. You’ll be responsible for the regular maintenance, utility bills, and other unexpected expenses such as repairing the roof or replacing the HVAC system. If purchasing a home leaves you without an emergency fund, unable to pay down other high-interest debts, or forces you to skimp on retirement savings, then it is likely not improving your financial situation.