Seller Tip: What Type of Financing Should You Offer to Buyers?
When listing your home for sale, there are many different types of buyers out there and their financing requirements are very different. Here are some of the common types of financing that we see in the Cedar Rapids/Marion/Iowa City area:
Conventional financing: Typically this is for buyers that have at least 5% down payment and are not usually first time home buyers. This is the most common and the terms are a fixed rate for 15, 20, or 30 years. The inspections and appraisal with this type of financing are the easiest for both buyers and sellers.
FHA financing: This is for first time home buyers with only 3.5% down payment available. (Also can be any other buyer as long as they have not owned a home in the last 3 years.) The inspections and appraisal are a little more challenging. For example, there can be no peeling paint inside or outside the house, the roof needs to have at least 3 years of life, etc. The buyers may be willing to buy a home with an older roof, but the FHA appraiser may disagree and the require the roof to be replaced prior to the closing or the financing will be denied.
VA financing: This is for retired or active military. These are 100% financing options for our veterans. The inspections and appraisal are much like the FHA types with safety concerns added in. If there are not handrails for stairs or there is a portion of the walkway or driveway that has settled, the seller may need to have it replaced or repaired as part of the approval process. In this type of financing, the seller is required to order and pay for the termite inspection.
ARM financing: This is the adjustable rate mortgage. Sometimes you will see this in conjunction with 100% financing for well-qualified buyers to avoid private mortgage insurance that is required by FHA and conventional mortgages when a buyer does not have a 20% down payment.
Rent to own or contract financing: This would be when a buyer is not able to obtain financing from a lending institution due to their credit score, length at a job, or debt to income ratio, but they have a large down payment and are willing to make payments to the seller for a 3,5, or 7 year term at an elevated above market interest rate. In return, the seller would maintain the ownership of the home but receive rent from the buyer to make the payments. Once the buyer is able to obtain financing, the price would be determined based on the current market, and the sale would happen.
Depending on the condition of your home or the price range of your home, you will want to consider the options carefully. For example, if your home is in poor condition or if you do not want to be required to make repairs/sell your home as is, you will not want to deal with an FHA or VA buyer. There will be repairs required for the buyer to obtain financing. You can refuse this type of buyer and financing, but you may be reducing your buyer pool to investors and handymen that will not want to pay as much for your home.
Over the weekend, a newer agent contacted me about a VA buyer for her listing. I looked on the MLS and the listing stated VA as an available type of financing term. The first question that I asked was if she had discussed the financing options with the seller. She said no, she just listed them all. So I advised her to discuss the options with the seller and let them choose whether or not they wanted to allow FHA/VA financed buyers. If the seller were to say that they will not make the necessary repairs required by the buyer's financing, the buyers would have wasted their time and money on inspections and an appraisal. The seller would have been upset in finding out that they were required to make these repairs as part of this buyer's financing approval.
As a homeowner, it is important to know what options are available as well as the requirements or risks involved in allowing them. Shrinking the buyer pool by not offering FHA or VA may be the best option for an estate property or for a seller in a short sale situation or just cannot afford to fix the things that are wrong with the house.
A great listing agent will explain the positives and negatives about the different types of financing and make suggestions about the repairs that could be requested. As the seller, you can decide if you want to get the repairs done prior to listing the home on the market, or if you want to exclude those buyers from seeing your home as an option.
Call me today for a free consultation about getting your home ready for the market!