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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 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.
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