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Looking to Purchase a Home? How Does Financing
Affect Your Offer?
Most buyers do not have enough cash available to buy a home, so they
need to obtain a mortgage to finance the purchase. Since you will
probably make your purchase contingent upon obtaining a mortgage, the
seller has the right to be informed of your financing plans in order to
evaluate them. That is one of the major reasons that financing details are
included in your offer.
Down Payment
As part of your offer, you will need to disclose the size of your down
payment. Once again, this allows the seller to evaluate your likelihood of
obtaining a home loan. It is easier to get approved for a mortgage when
you make a larger down payment. The underwriting guidelines are less
strict.
Interest Rate
Another reason for including financing information in your offer is to
protect yourself. If interest rates suddenly become volatile and rise
quickly, as sometimes happens, you may looking at a mortgage payment
much higher than you anticipated. By putting a maximum acceptable
interest rate in the offer, you are protecting yourself from such an
occurrence.
At the same time, the seller will probably want to see that you have some
flexibility in the financing terms you are willing to accept. If interest rates
are currently at eight percent and you indicate this is the highest rate you
will accept, you would be able to cancel the contract without penalty if
interest rates rose past that point. The seller would suffer because they
have lost valuable marketing time and may have made their own plans
based on successfully closing the transaction.
Asking for Closing Costs and Financing Incentives
There may be times when, as part of your offer, you request the seller to
pay all or a portion of your closing costs, or provide some other financial
incentive. One common request is asking the seller to provide funds to
temporarily buy down your interest rate for the first year or two. Such
incentives can be especially effective if a buyer is tight on money or
pushing their qualifying ratios to the limit.
Whenever you ask for incentives such as these, you will probably find the
seller less willing to negotiate on price. After all, what you are really asking
for is have the seller to give you some money to help you buy their house.
The end result is that, for a little relief in the beginning, you are willing to
pay a little more in the long run.
Seller Financing
Another occasional request is to have the seller "carry back" a second
mortgage to help facilitate your purchase of their home. In cases when the
seller does not need all the proceeds from their sale in order to purchase
their next home, this is an option. The advantage to the buyer is that by
combining your down payment and the second mortgage from the seller,
you may be able to avoid paying mortgage insurance and save yourself
some money.
If such a carry-back is part of your offer, you should include the terms you
wish to pay on such a second mortgage. Keep in mind that your first trust
deed lender needs to know this information so they can underwrite your
loan, and they have certain minimum requirements. The minimum term of
the second mortgage can be five years. The minimum payment can be
"interest only." Longer mortgage terms and payments that also include
principle are also acceptable.
Cash Offers
If you are one of those rare individuals making a cash offer to buy a home,
it makes sense to provide some documentation with your offer that shows
you have the funds available. A bank statement would be fine. If you have
to liquidate stock or some other asset, your offer should give a timetable
on when you will provide proof you have converted the asset to cash.
Other Financing Details in Your Offer
Your offer should also contain information on whether you are obtaining a
fixed rate or an adjustable rate mortgage. It should also state whether you
are obtaining conventional financing or obtaining a VA or FHA loan.
Affect Your Offer?
Most buyers do not have enough cash available to buy a home, so they
need to obtain a mortgage to finance the purchase. Since you will
probably make your purchase contingent upon obtaining a mortgage, the
seller has the right to be informed of your financing plans in order to
evaluate them. That is one of the major reasons that financing details are
included in your offer.
Down Payment
As part of your offer, you will need to disclose the size of your down
payment. Once again, this allows the seller to evaluate your likelihood of
obtaining a home loan. It is easier to get approved for a mortgage when
you make a larger down payment. The underwriting guidelines are less
strict.
Interest Rate
Another reason for including financing information in your offer is to
protect yourself. If interest rates suddenly become volatile and rise
quickly, as sometimes happens, you may looking at a mortgage payment
much higher than you anticipated. By putting a maximum acceptable
interest rate in the offer, you are protecting yourself from such an
occurrence.
At the same time, the seller will probably want to see that you have some
flexibility in the financing terms you are willing to accept. If interest rates
are currently at eight percent and you indicate this is the highest rate you
will accept, you would be able to cancel the contract without penalty if
interest rates rose past that point. The seller would suffer because they
have lost valuable marketing time and may have made their own plans
based on successfully closing the transaction.
Asking for Closing Costs and Financing Incentives
There may be times when, as part of your offer, you request the seller to
pay all or a portion of your closing costs, or provide some other financial
incentive. One common request is asking the seller to provide funds to
temporarily buy down your interest rate for the first year or two. Such
incentives can be especially effective if a buyer is tight on money or
pushing their qualifying ratios to the limit.
Whenever you ask for incentives such as these, you will probably find the
seller less willing to negotiate on price. After all, what you are really asking
for is have the seller to give you some money to help you buy their house.
The end result is that, for a little relief in the beginning, you are willing to
pay a little more in the long run.
Seller Financing
Another occasional request is to have the seller "carry back" a second
mortgage to help facilitate your purchase of their home. In cases when the
seller does not need all the proceeds from their sale in order to purchase
their next home, this is an option. The advantage to the buyer is that by
combining your down payment and the second mortgage from the seller,
you may be able to avoid paying mortgage insurance and save yourself
some money.
If such a carry-back is part of your offer, you should include the terms you
wish to pay on such a second mortgage. Keep in mind that your first trust
deed lender needs to know this information so they can underwrite your
loan, and they have certain minimum requirements. The minimum term of
the second mortgage can be five years. The minimum payment can be
"interest only." Longer mortgage terms and payments that also include
principle are also acceptable.
Cash Offers
If you are one of those rare individuals making a cash offer to buy a home,
it makes sense to provide some documentation with your offer that shows
you have the funds available. A bank statement would be fine. If you have
to liquidate stock or some other asset, your offer should give a timetable
on when you will provide proof you have converted the asset to cash.
Other Financing Details in Your Offer
Your offer should also contain information on whether you are obtaining a
fixed rate or an adjustable rate mortgage. It should also state whether you
are obtaining conventional financing or obtaining a VA or FHA loan.