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Do Sellers Prefer Conventional Loans?

What You'll Learn: Why Some Sellers Prefer Conventional Financing

EXPECTED READ TIME: 6 MINUTES

Putting your home on the market requires a lot of hard work. And once it’s listed and the offers start coming in, as a seller, you’ll have some decisions to make. One of them may be what type of financing are you willing to accept — conventional, FHA, or VA. According to the National Association of Realtors (NAR), in 2020 – 62% of home buyers used conventional loans. Read on to see why some sellers prefer conventional financing and what you should consider when accepting offers.

Conventional Home Loans Close Slightly Faster

In an April 2021 article by Forbes, conventional loans closed three to four days faster than FHA and VA loans. Here are the numbers:

Loan Type

Days to Close

Conventional Home Loan

47

FHA Home Loan

50

VA Home Loan

51

As you can see, that’s not a big difference. One thing to keep in mind is the above stats were for March 2020 through February 2021, which is during the pandemic. So, those times could be longer than normal.

Ellie Mae’s Origination Insight Report has stats from September 2019 through January 2021. Take a look.

Loan Type

Days to Close

Conventional Home Loan

54

FHA Home Loan

61

VA Home Loan

61

So, conventional loans do close faster, but not by much. Although if you’re in a big hurry, accepting an offer with conventional financing could be your best option.

Conventional Loans Have a Higher Close Rate

Now let’s talk about which type of mortgage is more likely to make it to the finish line. Ellie Mae’s Origination Insight Report has stats from September 2019 through January 2021 for the percentage of purchase loan applications that closed from the previous 90-day cycle.

Loan Type

% closed

Conventional Home Loan

79.9

FHA Home Loan

76.6

VA Home Loan

77.8

From these percentages, conventional loans do have a higher close rate especially compared to an FHA loan.

Of course, there are many reasons why a loan doesn’t close, and it might not have anything to do with what type of home loan product the borrower is using.

Here are some of the top reasons why a loan might not close.

  • Inspection shows severe termite damage
  • The home inspection uncovers other issues
  • The appraisal comes in too low
  • The title isn’t clear (i.e., liens, judgments, etc.)
  • Buyers or sellers change their mind
  • Natural disasters occur (fires, earthquakes, hurricanes)

Do conventional borrowers have better credit?

Conventional home loans have stricter credit guidelines than government loans like FHA and VA. For a conventional mortgage, the minimum score is 620. Although the best rates, go to borrowers with scores of 740 or above.

Let’s look to see what the average FICO score was for the mortgages that closed, according to Ellie Mae, in the same time period as referenced above.

Loan Type

Average FICO Score

Conventional Home Loan

757

FHA Home Loan

683

VA Home Loan

723

From the scores above, conventional buyers tend to have a higher credit score. VA borrowers come next, followed by FHA. But, since the real estate crash of 2008, lenders have stiffened up their guidelines to ensure that borrowers are well qualified.

Conventional Loan Appraisals vs. Government Loans

Appraisal standards vary between conventional, FHA, and VA loans. Government loans have strict minimum property guidelines.

Properties being sold “as is” with deferred maintenance like extensive dry rot, bad roofs, broken windows, or termite damage will need buyers with cash or conventional financing.

That’s why some listings may say the property cannot be financed by a VA or FHA loan. There’s too much-deferred maintenance the seller won’t be fixing before the close of escrow. In that situation, FHA and VA won’t lend on the property.

VA & FHA vs. Conventional for Seller

As you can see from above, all three of these loan types, conventional, FHA, and VA offer reliable funding options that a seller can trust. And turning away FHA or VA borrowers can severely restrict their number of offers.

Unless a seller has a property that won’t pass a VA or FHA appraisal, generally, they should feel confident in the loan closing as long as the buyer has a preapproval by a reputable lender.

Of course, a seller has to look at how strong the borrowers are financially. But it’s good to put some myths to rest about conventional vs. government financing.

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