Why Do Sellers Prefer Conventional Buyers? | Homestead Funding Corp. (2024)

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Why Do Sellers Prefer Conventional Buyers? | Homestead Funding Corp.? ›

Sellers often prefer conventional buyers because of their own financial views. Because a conventional loan typically requires higher credit and more money down, sellers often deem these reasons as a lower risk to default and traits of a trustworthy buyer.

Sellers often prefer conventional mortgages because they usually offer lower interest rates and the qualification requirements can be more lenient than those of an FHA loan. Additionally, with conventional loans, sellers may not have to pay private mortgage insurance or other upfront costs associated with an FHA loan.

Conventional loans are typically faster to close than VA loans. “Conventional loans [may] also receive appraisal waivers, reducing your closing costs and increasing certainty of closure for a real estate purchase,” says Davis. “And there is no funding fee for a conventional loan”

If you're a first-time buyer or someone with a weaker credit score, then an FHA mortgage loan can be easier to qualify for. However, if you can put 20% or more toward a down payment and want to look a bit stronger to prospective sellers, then a conventional loan may be your best bet,” says Channel.

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.

FHA loans require the borrower to live in the home as their primary residence, so they can't invest in or flip properties. With conventional loans, individuals can buy a variety of property types including private homes, investment properties and vacation houses.

Is an FHA or conventional loan better? A conventional loan offers more advantages than an FHA loan if you have good credit (around 680 or higher) and at least 3 percent down. However, if your credit score is in the high-500s or low-600s, an FHA loan might be a more affordable option.

One of the primary reasons some sellers may hesitate to accept a VA loan is due to misconceptions about the program. Some sellers believe that VA loans involve more red tape, delays, or stricter inspection requirements compared to conventional loans. In reality, VA loans are not as cumbersome as they may seem.

Sellers often prefer conventional buyers because of their own financial views. Because a conventional loan typically requires higher credit and more money down, sellers often deem these reasons as a lower risk to default and traits of a trustworthy buyer.

Some sellers reject VA loans because of that inspection, assuming it'll complicate the sale. But, sellers don't necessarily need to pay for any required repairs themselves, Wemert points out. In many cases, VA buyers might be willing to cover the cost.

Why are FHA loans less attractive to sellers? ›

One reason a seller might refuse your FHA-backed offer is that they believe the home sale may be more likely to fall through due to the FHA loan program's more lenient underwriting requirements.

“If there are multiple offers on a home, sellers tend to give preference to borrowers with conventional financing,” Yates said. Why is that? Sellers worry that if they accept an offer from a borrower with FHA financing, they'll run into problems during both the home appraisal and home inspection processes.

Other things that FHA or VA appraisers might be looking for are deteriorating brick, rotted wood, exposed wires, signs of leaks, roof issues, foundation issues, etc. So in order for sellers to avoid having to fix any of these things they will list their home to only take offers from Cash or Conventional buyers.

Down payment: While 20 percent down is the standard, many fixed-rate conventional loans for a primary residence allow for a down payment as small as 3 percent or 5 percent. Private mortgage insurance (PMI): If you put down less than 20 percent, you'll have to pay PMI, an additional fee added to your payments.

Higher Closing Costs

As noted above, conventional loans tend to have lower closing costs (and be cheaper in general) than government-backed options. However, the downside of conventional loans is that they don't offer as much flexibility to help you avoid paying those costs upfront.

A conventional loan is a mortgage that's not insured by a government agency. Most conventional loans are backed by mortgage companies Fannie Mae and Freddie Mac. Fannie Mae says that conventional loans typically require a minimum credit score of 620.

Weighing Conventional Loan Pros and Cons

If you have a high credit score, a conventional loan can give you access to the best rates and the most flexible loan terms on the market. For buyers with lower scores or less cash to bring to the table, though, it's worth exploring government-backed loan options.

FHA Underwriting Worries Some Sellers

Because FHA loans help low- to moderate-income borrowers with less-than-stellar credit become homeowners, sellers may feel that FHA buyers are less likely to be approved for a loan than conventional borrowers.