Sellers dismiss loan programs that aid veterans and first-time home buyers

Ask the Expert Buying Fall House Hunt
. —Peter and Maria Hoey for The Boston Globe

It may not be surprising that home sellers prefer a cash offer, but the bias against some mortgages is startling.

A mortgage loan guaranteed by the federal government sounds like a pretty safe bet, yet some real estate agents and sellers prefer not to accept offers with financing in the form of a VA loan (guaranteed by the Veterans Affairs department) or an FHA loan (insured by the Federal Housing Administration).

“The issue of some sellers not accepting offers with VA or FHA financing is primarily about competition,’’ said Brian Koss, executive vice president of the Mortgage Network in Danvers. “If sellers have enough other offers, they’ll push aside FHA and VA offers in favor of one with a bigger down payment.’’

VA loans have a zero-down payment option, and FHA loans offer financing with a down payment as low as 3.5 percent of the home price.

“The important thing for agents and sellers to remember is that each veteran earned their VA loan benefit by basically writing a blank check to the US government for an amount up to and including their life,’’ said Matthew Dolan, a real estate agent with Sagan Harborside Sotheby’s International Realty in Marblehead. “People who want to support the troops should respect the VA loan benefit.’’

Dolan pointed out that in housing markets with a military base or large veteran population, VA loans are well understood and common. In the Boston market, he said, fewer buyers use VA financing.

“If an agent has a bad experience with one VA loan or one FHA loan, the idea that they’re all difficult can linger,’’ Koss said.

Nationally, 10 percent of all new mortgages are VA loans, and 18 percent are FHA loans, according to the Origination Insights Report for June 2019 issued by Ellie Mae, a software provider for mortgage companies.

Some guidelines for these government-insured loans differ slightly from conventional loans, but there are also some misconceptions that hurt the programs’ reputations.

VA loans

Some agents believe VA loans are slow and complicated to close, which is not necessarily the case.

“This is not your grandfather’s VA loan,’’ said Chris Birk, author of “The Book on VA Loans’’ and director of education for Veterans United Home Loans in Columbia, Mo. “The VA has invested in extensive technology to improve the process.’’

While the average time for all purchase loans from contract to closing is 45 days, the average time for VA loans is slightly longer at 48 days, according to Ellie Mae.

A bigger concern for some sellers is the lack of a down payment, which typically means VA buyers provide a lower earnest money deposit with their offer, Dolan said.

In the end, the sellers will receive their full payment, but until the contract closes, they may feel less secure because the buyers have less “skin in the game,’’ Dolan said.

“A zero or low down payment can be a problem if the house doesn’t appraise for the sales price,’’ Koss said. “For example, a borrower with a 20 percent down payment can switch to a lower down payment if the appraisal comes in $10,000 below the sales price and use the extra cash to pay the difference. Borrowers using VA or FHA financing may not have that flexibility.’’

However, some VA borrowers have plenty of cash and choose the VA program because it is a benefit for their military service, Birk said.

The fact that VA loans require an appraisal of both the value and the condition of the property also can put off sellers.

“Some people think the house has to be perfect to meet the condition appraisal, but the goal is just that the house meets minimum standards for health and safety,’’ Birk said. “It’s not a granular look at the property and shouldn’t be a substitute for a home inspection.’’

The appraisal reviews items such as the age of the roof and electrical system, which can be a problem in an area like Boston, which has an older housing stock. Sellers are not required to fix any issues, and, in some cases, veterans pay to make repairs before the closing so the house can pass the appraisal, Birk said.

However, Birk acknowledged, the VA appraisal cannot be waived and that can put VA buyers at a disadvantage in a multiple-offer situation.

And if you are looking at buying a condo, you need to check that the building has been approved for VA financing. “In the Boston area, there are a lot of small apartments and houses that have been converted to condos,’’ Dolan said. “If the condo hasn’t been approved, it can take some extra time to get it approved.’’

When it comes to closing, some homeowners think that because VA loans allow sellers to pay up to 4 percent of closing costs, that they must contribute to those costs, but that’s not required, Birk said.

FHA loans

Borrowers with FHA financing face similar concerns about closing delays, low down payments, and possible appraisal issues, but FHA loans close in an average of 45 days, the same as all other purchase loans, according to Ellie Mae.

If buyers don’t have additional cash resources and the property does not appraise for the asking price, the deal might need to be renegotiated or canceled, Koss said.

FHA loans also require an appraisal of the condition of the house.

“There’s a connotation that FHA appraisers are picky about the quality of a house or that the sellers have to fix everything, but that’s not always the case,’’ Koss said.

A relatively simple fix, Koss said, is for the borrower to switch to an FHA 203k loan that allows buyers to finance renovations with their mortgage.

“It’s not unusual to see a listing with the phrase ‘may not qualify for FHA or VA financing,’ which is an indication that the property may be a fixer-upper,’’ said Dana Bull, a real estate agent with Sagan Harborside Sotheby’s International Realty in Marblehead. “Some sellers have older homes with lots of character, but they get nervous about not being able to pass a condition appraisal.’’

VA and FHA appraisals are similar to a home inspection that could trigger requests for repairs, Koss said.

And like VA loans, FHA loans for condos require the building to be approved for FHA financing. However, the Department of Housing and Urban Development announced in August that it will allow “spot approvals’’ for condo buyers, which will speed up the process of getting an FHA approval even if the building has yet to be approved, said Koss.

“This is especially important in Boston because there are lots of two- to four-unit condos, and now it will be easier to get those approved for FHA loans,’’ Koss said.

Buyer opportunities

To improve your chances of getting your offer accepted with a VA loan or an FHA loan, Dolan recommended working with an agent who understands the issues that some people have with them and can set expectations with sellers and their listing agent.

“It’s important to know that your real estate agent is comfortable with FHA or VA loans and can sell your offer rather than apologize for the financing,’’ Koss said. “It’s best to have an agent who can advocate for you and explain that this is a good offer with solid financing that has been preapproved and will close.’’

Buyers using a VA loan can write a letter to accompany the offer describing their service to the country, Dolan suggested.

“FHA loans are a great tool that put homeownership in reach for a larger demographic, but you also need to be realistic and have a game plan when you’re making offers,’’ Bull said.

For example, if you plan to buy an older home, evaluate a renovation loan. If you want a condo, find out whether the building has FHA or VA loan approval in place.

“Some sellers and agents just need some education on how these loans work,’’ Dolan said. “Others would love to accept an offer from a vet but don’t have the luxury of time and need the certainty that the loan will close quickly. Others just want a better offer.’’

Besides changing perceptions of these loans, Bull said, a less competitive market will naturally mean that sellers will be more receptive to offers with every type of financing.

Michele Lerner can be reached at [email protected] Subscribe to the Globe’s free real estate newsletter — our weekly digest on buying, selling, and design — at Follow us on Facebook and Twitter @globehomes.