How Financing Can 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; this 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 your down payment amount so the seller can evaluate your likelihood of obtaining a home loan. A larger down payment will make the mortgage approval process easier. 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 be 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 provide a financial incentive such as paying all or a portion of your closing costs. 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 this option is part of your offer, include the terms you wish to pay on the second mortgage. Keep in mind that your first trust deed lender needs to know this information so they can underwrite your loan. They have certain minimum requirements such as a minimum term of the second mortgage (can be five years) and the minimum payment (can be 'interest only’). Longer mortgage terms and payments that include the principle are also acceptable.
Cash Offers: If you are one of those rare individuals making a cash offer on a home, you’ll want to provide some documentation, such as a bank statement, that shows you have the funds available. 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, and should state whether you are obtaining conventional financing or obtaining a VA or FHA loan.