Conventional loans tell the seller that the buyer is typically in a better financial situation and the time to close on the sale is faster.
Homebuyers often like Conventional loans because of their flexible down payment options, which can be as low as 3%, easier inspection requirements, and the opportunity to get rid of mortgage insurance.
Sellers are wary of FHA loans because they believe their property will have to pass a level of scrutiny that conventional loans don't. FHA indeed has minimum property requirements (MPRs) that don't apply to other loans.
Do sellers prefer conventional over VA loans? VA loans can take longer to close than a conventional loan because the underwriting process is longer. Some sellers may not be willing to wait the extra time it takes for a VA loan to close.
At times, sellers might shy away from VA loans, worried about the appraisal process. They fear VA appraisals are far stricter than conventional loans, potentially undervaluing their home or demanding costly repairs before closing.
A major benefit of a conventional loan is that the buyer often has higher credit ratings and more capital available for a down payment than with an FHA loan. On the other hand, FHA loans may be attractive to some sellers since they only require a small downpayment and have traditionally lower closing costs.
Why? They feel that buyers who can secure any other financing option are 'stronger buyers. ' FHA buyers have a reputation for having low credit scores, little money to put down, and less than optimal qualifying requirements. Sellers want a 'sure thing' when they sell their home.
The minimum down payment requirement for a conventional loan is 3% of the loan amount. However, lenders may require borrowers with high DTI ratios or low credit scores to make a larger down payment. Even if it's not required, if you're able to make a higher down payment, you may want to consider doing so.
Reasons for an FHA Rejection
There are three popular reasons – bad credit, high debt-to-income ratio, and overall insufficient money to cover the down payment and closing costs of a home.
Benefits of a Conventional Loan
Conventional mortgages are often the best choice for borrowers who have excellent credit and a down payment of at least 20 percent. These loans can be used to buy a primary home, second home or investment property, unlike FHA or VA loans, which may only be used for a primary home.
Reasons your mortgage application may be denied include a dip in your credit score, increased debt, paperwork errors, a low home appraisal and unverified cash deposits.
Seller concession limits for conventional loans typically range from 3% to 6% of the home's purchase price. However, the limit varies based on factors such as the buyer's down payment and the loan-to-value ratio.
These loans are perfect for borrowers with a strong credit history and the funds for a more substantial down payment. Conventional loans offer the ability to avoid the costs of mortgage insurance while also giving borrowers the option of fixed or adjustable rates.
Given the potential speed and flexibility of the arrangement, seller financing may also help the owner attract more prospective buyers for their property. Sellers may skip making the kinds of repairs typically advised when preparing a property for sale.
A lot of first-time homebuyers think they need a 20% down payment to qualify for a conventional loan. That's simply not true. Conventional loan down payment requirements are as low as 3%. That's only $9,000 down for a $300,000 home, or $6,000 down for a $200,000 home.
Which loan is better: FHA or conventional? To a large extent, that depends on you and your financial profile. Generally, a conventional loan is best for those with strong credit and a bigger home buying budget. If your credit score is below 620, a loan backed by the FHA might be your only option.
Unfortunately, sellers often perceive the FHA loan approval process as risky because of the FHA's relatively lenient financial requirements and stricter appraisal and property standards.
Since your home must meet FHA property minimums, the appraisal process may include more requirements than a conventional home loan. The appraisal is required to be performed by an FHA approved appraiser and may have additional inspections which could result in a higher appraisal cost.
Some reasons a seller might refuse an FHA loan include misconceptions about longer closing times, stricter property requirements, or the belief that FHA borrowers are riskier.
Lower Interest Rates
While conventional loan interest rates are typically a bit higher than FHA rates, you could still get a lower interest rate and save money if current refinance rates are lower than when you first took out the loan. A lower interest rate could potentially save you thousands of dollars.
The Advantages of a Conventional Mortgage
Homeowners with good credit and money for a larger down payment could avoid paying upfront mortgage insurance or monthly mortgage insurance like an FHA loan.
During the appraisal, a professional will assess the home's condition and determine its fair market value. An FHA appraisal can require repairs before the loan is approved. That's more strict than a conventional loan.