How Financing Details 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 Rates
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.
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 to 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.
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