Do Home Sellers Have Loan Type Bias?

While the real estate market may becooling off,buyer demandis still very real due to the shortage of homes and low interest rates, and therefore it’s still very much a seller’s market. According to the National Association of Realtors (NAR), the housing deficit is atunits. In this seller’s market, sellers often can choose from multiple offers.

However, if you’re looking to buy a home, not all loan types are created equal. If a seller receives three different offers, all for the same price, but with three different financing options – thereisa bias favoring certain types of financing.

Cash is King

Cash buyers are by far the most attractive because they don’t need to secure a mortgage. No financing contingency means the transaction can close smoother and faster. They have the luxury of not having to deal with home appraisal issues. For example, if the home appraises for less than the agreed-upon offer to purchase price, the buyer and the sellers need to come to a mutually beneficial solution if the potential of this occurring wasn’t dealt with in the offer or the deal may fall through. Case in point, in the chart below from the National Association of Realtors (), sales from all-cash-buyers rose sharply to 25%.

Loan Type Preferences

Next in line are conventional loans with a 20% down payment. If you can’t make a cash offer, a large down payment can strengthen the appearance of your offer because it signals to the seller that you’re on solid financial footing and that your financing is likely to be approved by a lender. Putting more down benefits the borrower financially, because it means lower mortgage payments, and you don’t need private mortgage insurance (PMI). With lower mortgage payments, borrowers also save on interest payments over the lifetime value of their loan.

The least preferred loan types are ones that enable smaller down payments such as Federal Housing Administration (FHA). These loans are riskier to the lender, and thus requirements are much more stringent. Before a lender will finalize an FHA loan, a HUD-approved property appraiser must evaluate the safety, integrity, and value of the property. If the property doesn’t make the minimum property requirements, someone has to make repairs in order to keep the deal together. If it doesn’t appraise for the value of the loan and the seller doesn’t reduce the price the buyer will not be approved, and the deal may fall through altogether. All this adds up to a more complicated transaction with fewer chances of that deal may make it to completion. Meaning, it’s more difficult for lower-income borrowers to offer full or over the asking price because their financing won’t be approved.

The biggest risk though is to the borrowers who put less than 10% down. On the off chance that the real estate market sees a slump, those with less than 10% down risk seeing their mortgage go underwater.

Lending Standards Are More Stringent

Borrowers today are in much better financial shape. Leading up to the 2008 housing crisis, only a quarter of borrowers had very good credit (above 760). An eighth of the borrowers were considered “subprime” (below 620). Since 2019 however, approximately 60% of borrowers had credit scores above 760. That number climbed to 73% in the first quarter of 2021 with only 1.4% going to subprime borrowers.

Realtor Sentiments

Thechartsbelow show an April National Association of Realtors (NAR) survey of real estate agents:

In the absence of a cash offer, 66% of realtors say their sellers would accept an offer to purchase with conventional financing of 20% down, while only 13% will accept an FHA or VA loan.

In the absence of a cash offer, 94% of realtors say their sellers would likely accept conventional financing, while only 3% will likely accept an FHA or VA loan.

Keep in mind, these results are based onrealtorresponses, NOT thesellers. Meaning these are what a typical realtor willrecommendto their sellers. However, sellers will likely follow their realtor’s recommendations.

Financing Means of Homes Sold in Lake Geneva, Fontana & Williams Bay WI Show More Prudent Lending Standards

Case in point, below are the terms of sale of condos and single-family homes sold in Lake Geneva, Fontana, and Williams Bay WI between June of 2020-2021 from the Wisconsin Metro MLS:

Cash makes up 42.8% of the homes sold, conventional loans of 20% make up 50.8%. That’s 93.6% of all homes sold.

As compared to the 2006-2007 year:

As you can see, cash and conventional loans made up 62.5% of sales, while adjustable-rate mortgages and other creative financing made up 37.1%. This goes to show that the appreciation is likely real and not a.

Bottom Line

If you are in a position to pay cash, make a cash offer. You can always get conventional financingafterthe home closes. That’s the best way of increasing your odds of having a winning bid.

If you’re not yet in a position to make an offer with cash or 20% down, don’t lose hope. The feeding frenzy is waning. Real estate agents are seeing fewer showings, fewer offers, and fewer bidding wars. The market is still strong, it’s just slowly getting back to normal. Keep doing what you’re doing to save so that you can eventually make a 20% down payment.

Withon the rise, the shortage of homes, and continued low interest rates, homebuyer demand is real and will continue. High demand and low supply mean that home prices will likely continue to hold their value. However, theseems to have burst, and we are seeing a slow down in the bidding and pricing frenzy.

If you’re looking to buy a home in Southeast Wisconsin, such as Lake Geneva, Fontana, Williams Bay, Delavan, or Burlington area, now is a great time as the sharp rise in value will level out.

Home values in the Geneva Lakes Wisconsin area saw a 13.8% appreciation from last year. If you’re looking to sell your home you haven’t yet missed out on this great, but the Covid frenzy of 2020 seems to be fading a bit more every month in 2021.

Get In Touch