Financing in the offer

Overview

The buyer being able to obtain financing and the type of financing is one of the biggest impacts in the offer and the decision of the seller in selecting a buyer for their home. Below are the key elements in the purchase agreement around financing.

Down Payment

Since you are most likely making your purchase contingency upon ability to obtain financing, disclosing the down payment is required. The higher the down payment the more likely to get approved for a mortgage as the underwriting guidelines are less strict.

Interest Rate

By putting a maximum interest rate in your offer, you are protecting yourself against any volatility in rates that could increase your monthly payment. Often time, you have the option to lock your rate with your lender prior to making an offer and the length of the lock will vary by lender, so you will want to discuss. By electing for this clause in the agreement, however, the seller may be less confident in your purchase agreement as it is just another out.

Seller Pays for Closing Costs

In a seller’s market, this request can make your purchase offer dead on arrival. Alternatively, in a buyer’s market, the seller may be willing to make concessions and absorb some of the closing costs, however, price will become more of a sticking point. Understand the current market conditions before exploring this option and if there are other buyers submitting offers on the property of interest.

Seller Financing

This is not as common and again in a seller’s market should not be pursued. There are options in a buyer’s market that the seller carry-back a second loan that is junior to your mortgage if they are not in need of all proceeds at once. This could help to save on the down payment as well as lower your monthly payment depending on the interest rate and if you are to incur private mortgage insurance (PMI). Your lender will need to be made aware of this arrangement to determine if your first loan can still pass-through underwriting for a successful loan approval.

Loan Type

Your offer must also stipulate what type of loan you are using. Conventional is ideal as the more cash you are bringing to the table the more favorable you are in the eyes of the buyer in being able to perform and close on the transaction. Other loan types, including FHA, VA, and ARMs must be disclosed in the offer. FHA loans do have further underwriting scrutiny and requirements, so are not as attractive to sellers, especially when they have multiple offers to choose from.

All Cash Offer

More often than not, especially in a hot real estate market, an all-cash offer will supersede all other offers if the price generally aligns as it one less of the major hurdles to get over. Sometimes all cash offers will waive the appraisal and/or inspection contingency depending on how far the buyer is willing to go. All cash offers can also close much sooner as the final loan approval is not required. If you have the means to make an all-cash offer, be ready to show proof of funds. If your funds are not liquid, lay out your plan for liquidating and how quickly your funds will become available. Having the means to make an all-cash offer makes you stand-out against the competition and the property can always be financed at a later date.