When are the Negotiations Over?

The primary negotiation in a home purchase takes place when the contract is agreed upon that includes the price, closing and possession.   With inventory down over 19% in the past year and multiple offers being more of the norm than the exception, the first round of negotiations can be challenging.

Buyers and sellers alike feel relieved once it has resulted in an agreement, but experienced agents know there is more to come if there are contingencies for financing, inspections, or other things.  The competition for the home may be so tough that the buyer waived their rights for what would be normal contingencies.

Financing is one of the most common contingencies in normal situations but when multiple offers are involved, the cash offers tend to have the advantage.  If you don't have the resources to make a cash offer, the next best position is to be pre-approved with a commitment letter from the lender.  Arrange for the lender to confirm the pre-approval directly with the listing agent prior to the listing agent presenting the offer.

There have been buyers who know they don't have the cash to close and apply for a mortgage anyway and try to reinsert the provision outside of the contract.  Experienced listing agents will advise the seller to have the buyer provide proof of funds necessary to close and verify that they do indeed exist.

The purpose of an inspection is for the buyer to receive an objective evaluation about the condition of the home and its components to identify existing defects and potential problems.  The expense for inspections can be several hundred dollars and it's reasonable for buyers not to want to spend the money before they find out if they can come to terms with the seller.  From a different perspective, sellers want to know quickly if the buyer is going to reject the home due to the inspections because they could be losing time.   For that reason, inspection time frames are limited to a few days from acceptance of the offer.

Sometimes, buyers will expect sellers to make all the repairs listed on the report and this is where the second round of negotiations begins. If the seller refuses, the negotiations can go back and forth until the other party accepts the offer on the table.

When purchasing a new home from a builder, it is expected for everything to be in working order; after all, it is new.  However, it is reasonable to expect that existing homes, that are not new, have a different standard.  While it's understandable that buyers would want to be aware about major items that are not in "working order", normal wear and tear of components based on its age should be expected.

In a highly competitive seller's market, buyers might do whatever they can to get their contract accepted, realizing that there is another place to negotiate when they're not competing with other buyers' offers to purchase.

The negotiations involved in a home purchase are not complete until the buyer and seller have signed the papers and the title has passed to the buyer.  Up until the closing is finished, any item that comes up could prolong the negotiations.

For this to be a WIN-WIN situation, both seller and buyer must feel good about the negotiations that led to transaction closing.  Neither party should feel that the other party had an unfair advantage over them.

You don't have to give an arm to get a lower rate

Rising interest rates compounded with increasing home prices are causing affordability issues for many buyers.  To keep payments low, you won't have to give an arm, but more buyers are considering getting an ARM, adjustable-rate mortgages.

Mortgage rates are near its highest point since 2009.  "While housing affordability and inflationary pressures pose challenges for potential buyers, house price growth will continue but is expected to decelerate in the coming months." said Sam Khater, Freddie Mac's Chief Economist.

A $400,000 home with 10% down payment and a 30-year term has the choice of a 5.27% fixed-rate or 3.96% for a 5/1 adjustable-rate mortgage.  The principal and interest payment will be $1,992.40 for the fixed-rate and $1,710.40 for the adjustable rate saving the buyer $281.99 per month for five years.

There is an additional savings for the buyer choosing the adjustable-rate mortgage because the unpaid balance at the end of the five-year first period is $6,429 less than the fixed-rate.  The total savings to the buyer on the adjustable-rate during the first period is $23,348 or $389.13 per month for sixty months.

At the end of the first period, the rate on the mortgage can adjust according to the then, current index plus the margin subject to the caps as specified in the note.  These safeguards remove control from the lender or servicer from arbitrarily raising the rate.

The caps restrict the payments from going up more than a certain amount at each period or overall, for the life of the mortgage.  A common cap might be that it cannot adjust more than 2%, up or down, at any given adjustment period or 6% above or below the initial note rate.

Adjustable-rate mortgages must adjust downward if the index indicates a reduction at the anniversary of the adjustment period.  The overall trend has been lower rates for the past thirty years until recently.

Using an Adjustable Rate Comparison tool, you can project a breakeven point to determine at what point the ARM would be more expensive than the fixed-rate, assuming a worst case situation where the rates would increase the maximum at each period.

In the case of the previous example, the breakeven would occur at 7 years and 6 months.  This means that if the buyer were to sell the home prior to that projection, the ARM would provide the cheapest cost of funds to purchase the home.  On the other hand, if the buyer knew they would stay longer than that, it might be a safer option to go with the fixed-rate.

It is good to be aware of available options when financing a home.  Analyzing, using the best information available, can help you make an informed decision.  Make your own comparison using our ARM Comparison.  Current interest rates can be found on Freddie Mac.

Helping the Seller See Your FHA/VA Offer More Favorably

With multiple offers the norm on many listings these days, the seller relies on their listing agent to help them determine which one to accept.  In some cases, offers subject to FHA or VA mortgages tend to move to the bottom of the list.

Some sellers consider all cash offers first and then, conventional offers with at least 20% down payments as the next most likely to close.  It may be because of a common misconception that FHA or VA buyers are poor credit risks and have a higher likelihood of not being approved.  Both FHA and VA do not require as strict credit requirements as conventional loans but if a buyer has been preapproved, that should alleviate that worry.

A legitimate concern regarding FHA and VA contracts could be that if the appraisal doesn't come in at the sales price, the buyer has an option to void the contract.  This means that the property would have to go back on the market and valuable time could be lost.  However, that could also be true for a conventional mortgage.

One major advantage for buyers using these government insured, or guaranteed loans is that a lower down payment is required.  Just because buyers prefer not to put 20% down payment does not mean that they are not credit worthy.  In the case of veterans, the VA loan is a perk for serving their country that provides one of the lowest cost mortgages available.

For FHA buyers wanting a low-down payment option, the mortgage insurance could be considerably less expensive than on a conventional loan.  Conventional loans usually want a 740-credit score for the best rate and lowest mortgage insurance.  As the credit score gets lower on conventional loans, the price for mortgage insurance goes up.   This is not true with FHA; the price is the same on any acceptable mortgage.

For buyers to increase the odds of getting their contract considered seriously or even accepted, the first step is to identify a mortgage professional who specializes in FHA and VA loans and get pre-approved before starting to look at homes.  Another option is to attach the pre-approval letter to the offer when it is made along with the contact information of the loan officer.

Have the mortgage professional personally call the listing agent as soon as the offer is made so they can go to bat for you and provide verified information that can be communicated with the seller.  Some agents have a predetermined idea that all FHA and VA loans are difficult and fraught with problems.  The mortgage officer, who specializes in these types of mortgages, can give the listing agent factual information about the way the loans work in today's market.

For the buyers who have the resources, another tactic may be to let the seller know that your first preference is to use an FHA or VA loan but if during the approval process, a snag develops, making it not possible, you would be willing to go with a conventional loan.

There are real estate agents who have never participated in an FHA or VA loan and there are agents who specialize in them and have lots of experience.  It is to your advantage to be working with an experienced agent.  They are going to be the agent who recommends a mortgage professional, writes your offer, presents it to the listing agent, and works with all the other professionals to get your FHA or VA transaction to settlement.