For Buyers
The Financing Details.
When you stop to think about it, purchasing a home will most likely be the largest purchase of your life. Most buyers don’t have enough cash available to buy a home outright, so they need to obtain a mortgage to finance the purchase. That purchase will be contingent upon obtaining a mortgage, and as a result, the seller has the right to be informed of your financing plans in order to evaluate them. That’s one of the major reasons that financing details are included in your offer.
The Down Payment.
A key component is the down payment. As part of your offer, you’ll need to disclose the size of your down payment. Once again, this allows the seller to evaluate your likelihood of obtaining a home loan. The larger the down payment, the easier it will be for you to be approved for a mortgage.
The Interest Rate.
So what about the 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.
The Financing Terms.
At the same time, the seller will probably want to see that you have some flexibility in the financing terms you’re willing to accept. If interest rates are currently at four 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 Closing Costs and Incentives.
What about closing costs and financing incentives? There may be times when, as part of your offer, you request the seller 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.
Keep in mind that when you ask for incentives such as these, you’ll find the seller less willing to negotiate on price. After all, what you’re really asking for is that the seller gives 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.
The Seller’s Role in 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 doesn’t need all the proceeds from their sale in order to purchase their next home, this is a great 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, as 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.
The Cash Offer.
If you’re one of those rare individuals making“all 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’ll provide proof you have converted the asset to cash.
The 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, as well as state whether you’re obtaining conventional financing or obtaining a VA or FHA loan.
