In this scenario, a seller will almost always pick the first offer.  Most sellers would be just fine missing out on that final $1,000 being offered by the second buyers because they would rather work with a buyer with a larger downpayment that would appear to be more financially capable, more readily able to cure any appraisal shortages, etc.  Interestingly, the second buyer seemed happy to pay $435,000 for the house, but is not likely to get the house because the differential of their escalation clause was only $1,000.

Now, then, here is an alternative scenario that the second buyer could have created which might have changed the thought process of the seller...

In this version of the offer situation, the second buyer will at least (likely) get the seller to slow down and give their offer some serious thought.  Even if the seller doesn't like the 95% financing situation, and the possible ramifications of that high loan-to-value ratio, to ignore that second offer is potentially leaving $10,000 on the table.

So... if you have a small downpayment, you may want to consider a larger differential in your escalation clause... otherwise, you shouldn't be surprised if your offer is not seriously considered by a home seller with multiple strong offers.