How Financing Might Affect Your Offer

Individual financing can impact your home-buying experience in several ways.  One obvious impact is the amount of financing for which a lender will approve you, depending on your financial situation and credit history.  But a little-known fact about home buying is that when you make an offer on a home, the seller will need to be informed about the type of financing that you will be using to purchase the home.

This report focuses on that second aspect of financing – what you need to disclose to the seller as part of your offer and how that information might change the seller’s perception of your offer.  Believe it or not, the type of financing that you have may influence the seller’s decision between two or more offers on the home.

While it is rare in today’s economy for a buyer to propose buying a home with cash, it does happen.  In this scenario, the seller is presented with some form of proof that the buyer has sufficient financial resources to meet the offer price.  This could be a savings or checking account statement or some other document from a financial institution.  A cashier’s check is definitive proof, but it is unwise to liquidate funds before the offer is accepted.  Often the buyer needs to liquidate an asset or two in order to generate the cash necessary to satisfy the purchase price.  If this is the case, the buyer will need to present the seller with a fairly accurate representation of how long it will take for the full amount to become available.  Cash offers are strongly favored by sellers, so buyers with enough cash to purchase a home should feel quite confident that their offer will be accepted by any seller.

Another uncommon method of financing a home is seller-assisted financing.  Here is how it works.  You, as the buyer, offer a down payment as part of your primary mortgage agreement.  This generally amounts to 20% of the home’s total purchase price.  The seller might offer to grant you a second mortgage for some amount that will be deducted from the sale price of the home.  Your mortgage would then be significantly lower than the standard 80% loan, meaning lower payments and no need for PMI.

You must disclose the details of seller-assisted financing to the lender, because it is subject to federal regulations for mortgage lending.  You must agree to the loan terms with the seller in advance.  This means that you will work together to determine the length of the loan, the monthly payment amount, and how the payments will be applied toward the loan. Lenders generally require that your seller-granted second mortgage must last at least five years.  There is also an allowance for buyers who choose to pay only the interest on the second mortgage, similar to a balloon loan where the buyer needs to pay off or refinance the loan within a specific amount of time.

Here are some common details about financing that the seller will want to consider when weighing your offer:

Down Payment Amount
You must disclose to the seller the full amount of your down payment.  For example, if you are making a 30% down payment as opposed to the required 20%, the seller will realize that you appear more attractive to lenders and should have no problem getting the financing needed to purchase the home.

Interest Rate
As a potential buyer, you may include in your offer letter the maximum interest rate that you would be willing to accept from the lender.  Then, if your lender is unwilling to meet or beat that interest rate, you will be able to decline the purchase contract with no penalty.

The seller will want to know your maximum willingness.  If you offer a maximum interest rate that is below the standard rate, as opposed to offering a maximum rate that is substantially above the current market rate, you will be less likely to grab the seller’s attention.

One way to offer a reasonable maximum interest rate is to be pre-qualified by your lender or to have a letter of credit in hand that declares the interest rate at which your mortgage loan will be extended.  Buyers with verifiable eligibility and financing are very attractive to sellers. This is one sure way to convince the seller to accept your offer.

Down Payment or Closing Cost Assistance
When you make an offer that includes a request for the seller to assist in paying some or all of the closing costs, you will end up paying more for the home than if you had offered to handle those expenses on your own.  When you are making an offer that includes seller assistance, you need to be reasonable in your total offer price.

Government Mortgage Programs
When you plan to borrow a mortgage that is guaranteed through some federal program, you must disclose the details of the financing to the seller as a part of your offer.  The biggest reason for this is “non-allowable expenses,” or fees that the federal government insists that you, as a buyer, not pay.  That’s right – there are restrictions on the closing fees that you can pay.  The fees, however, will not be waived, and therefore the seller will have to assume these fees on your behalf as part of the purchase agreement.  You can compensate the seller by offering a higher price for the home, but you will never be allowed to simply repay the seller for his or her expenses.

Another way in which government-guaranteed financing affects a seller’s view of your offer is that the government agency requires a home appraisal prior to the finalization of the sale.  When you use a program like this, part of your offer is the maximum amount of funding that the seller would need to put toward the cost of any repairs that need to be made to the home prior to the sale.  For example, you could state that if $1,000 in repairs were needed, the seller would pay half of the cost.  In this situation, the seller will insist that you list his or her maximum contribution toward repairs.  Otherwise, a wise seller will never agree to the offer.

Remember that you can always increase your sales price offer to offset the seller’s expenses.

Conclusion
If you make a reasonable and honest offer to a seller and there are no competing bids, your offer stands a very good chance of being accepted.  However, negotiations are common and important in home sale transactions. You need to ensure that the needs of both yourself and the seller are being considered fairly in the offer.