In the red hot housing market of the past few years, sellers usually have multiple offers, often getting more than their listing price. If you are using a VA loan to back your purchase you may worry that sellers might choose conventional-loan-backed offers over yours. Here are a few things you can do to stay competitive with VA loan-backing in a seller’s market.

The Difference Between VA Loans and Conventional Mortgages

First, it’s important to understand what makes a “strong offer.” Sellers are looking for the bid with the most amount of money and least amount of hassle. That means they are looking for offers that look like the buyer is in a very good financial position. Conventional mortgages will typically require a minimum of 5% as a down payment whereas VA loan borrowers can put nothing down in some cases. Consider this situation: the bidding war on a house pushes the price well beyond the listed price. There are two offers for exactly the same amount, one with conventional funding and a 20% down payment, and one with VA loan backing and 0% down payment. If the home appraisal comes back lower than the contracted sale price, these buyers will have to come up with extra money from their own personal funds to cover the difference. Looking at the two offers, the seller is likely to choose the buyer with a 20% down payment, perhaps thinking that they have more money to work with. 

VA loans are extremely good loans as well though, typically making up about 15% of all home purchases. These mortgages, partially backed by the Department of Veteran Affairs, provide veterans and their spouses with excellent benefits, like low or no-down payment requirements, no private mortgage insurance, and no set credit score requirement. And they close on time, with no problems, just as often as conventional mortgages do. So how can you convince your seller that your VA loan offer is the best in the bunch?

Work with an Experienced Lender

Take care to find a mortgage lender who specializes in VA loans. Their knowledge of ins and outs of the funding can help you know how to strengthen your offer. They might also be able to add a note in your pre-approval letter mentioning their know-how and how many recent VA loans they have had.

Increase the Down Payment

If you can afford to contribute anything as a down payment, the seller will probably consider your offer stronger. If you can put down 5% that will match the minimum of many conventional loans. Plus putting down 5% will decrease the VA loan funding fee you’ll have to pay from 2.3% to 1.65%. 

Add Favorable Terms

If you can’t make a larger down payment, you could consider offering more to the “earnest money” deposit made before closing. You could really make a mark on the seller by offering 5% for example, rather than the required 1%. This signals commitment and a financial ability to close the deal. Or you could offer to waive some of the contingencies to show your dedication to this purchase.

Competing with a VA loan in a hot market is definitely doable as long as you come prepared with a little knowledge of how to sweeten the deal!

During the home buying process, you will encounter many unfamiliar terms, some of which may seem like the same thing. One such pair might be “sales price” and “appraised value.” They both refer to how much the house is worth, right? Actually, there is a difference between these words and it is important to understand what they each mean.

Sales Price

The sales price is the exact amount you pay for the home. This could be the list price, but it could be lower or higher depending on the market conditions and your agent’s negotiating skills. In a seller’s market, you are likely to pay more than the asking price because of stiff competition and bidding wars. However, in a slower market you might be able to talk the seller down to a lower price if they are motivated to sell.  If you go under contract and the inspections turn up major damage or problems, you might also be able to have the seller knock off the price to compensate for needed repairs.

Appraised Value

The appraised value is decided by a licensed home appraiser. This professional will come to the house, and evaluate the location, home’s condition, features, any improvements that have been made, and will factor all those things into account along with the general market trends.

When the Difference Matters

While the sales price is essentially a measure of how much buyers are willing to pay for the property, the appraised value is supposed to be a gauge of the “true value” of the home. One is all about supply and demand while the other is about the fundamentals of the house.  Where this difference could matter in your home buying experience is that if the appraised value ends up coming in lower than the amount you agreed to pay the seller, paying for the discrepancy will be your responsibility, not the lender’s. 

For example, let’s say you have been pre-approved by your lender for a mortgage of up to $400,000. You find a property you want, and you win it with a bid of $500,000. You plan to contribute $100,000 of your own money as a down payment, so the bank should be able to cover the remaining $400,000, right? Yes, unless the appraised value comes in lower than your offer to the seller. Because of the neighborhood or the condition, say the appraiser determines the house is only really worth $460,000.  So now you need to be able to pay for the difference on your own as well. Subtracting the appraisal value from the offered price ($500,000 - $460,000) leaves you with $160,000 to contribute instead of just your original $100,000 down payment. If you are unable to do this, the deal will likely fall through and you’d lose out on that sale. 

However, in certain cases, the appraised value comes in higher than your buying bid. This does not affect your mortgage financing, but it is great news for you. It means that as soon as you close on the house, you will instantly have more equity in the property than you put into it.

Strategies to Avoid Financing Trouble

If you are buying in a hot market, you may need to stay away from properties that are at the very top of your budget. Otherwise, you could easily over run your loan limit if the appraised value is lower than the sales price. 

In a seller’s market it can be easy to be outbid, though. So, you could also look to friends and family or non-profit organizations for down payment gift money to help stretch your budget.

If you are looking to buy a vacation home in one of your favorite spots, one of the most important questions to ask yourself is “Can I afford to buy a second home?” The answer will depend on a variety of factors.

While some buyers have the cash to buy a second home, you’re likely one of the 70% of vacation home purchasers that need to take out a mortgage. Since this is a second home, you’ve already been through the mortgage process before. However, because this new mortgage is for a property other than your primary residence, there are a few differences.

Differences Between Primary Residence and Second Home Loans

As buying a second house could put additional strain on your finances, it is considered riskier to the lender than your primary residence mortgage. As a result, the interest rate will likely be roughly 0.25% to 0.5% higher and you will probably be required to put down a larger down payment, upwards of 10%, instead of just 3.5% like on some first mortgages. You may also need a slightly higher credit score for this purchase than you did with your original loan. 

What Costs Go into a Second Home?

Although you plan to live in your second home only part-time, you still need to be able to afford the mortgage payments and property taxes ALL the time. It is also important to add in the cost of the utilities, insurance, maintenance, repairs, landscaping and travel expenses. 

How Can I Pay for the Down Payment?

There are other ways to finance your second home down payment than just saving up your own cash. If you have significant equity in your first home, you could take out a cash-out refinance loan. This creates a new mortgage on that property for a larger amount, and you get a lump of cash that you can use for any purpose, including as a down payment for another home. You could also take out a home equity line of credit. This is a second loan tied to your first home that allows you to pull out cash from your equity as needed. These types of mortgages offer lots of flexibility. 

Can I Rent Out my Second Home?

To offset your vacation home costs, you might want to rent it out for part of the year. This is usually possible but you should first check your mortgage contract to make sure there aren’t any restrictions on how long you have to use it as a second home before turning it into an investment property. You should also be aware that this will affect your tax situation. The IRS defines a second home as one that you live in for more than 14 days a year or at least 10% of the total days you rent it out. You will need to report your rental income on your taxes.  One good benefit of using your vacation home as a part-time rental is that you can typically write off the mortgage interest, maintenance, and utility bills as business expenses on your taxes, something not allowed with second homes.

If you’re still not sure about your ability to afford a second home, bring your questions to us. We can help you go through your qualifications and resources to make a final determination.