Terms are often overlooked because people are so preoccupied with price in this economy. However, they are, in many cases, just as important as price. I often have buyers question what difference the size of their down payment makes to the seller, since the money is just as green if it comes from the lender is it did their bank account. In a zero sum world, this is true. But context is important, and there is an immutable law that cannot be avoided:
Guarantees cost money. Certainty costs money.
If you are going to put 20% or more down on a house, your lender will not require you to pay for mortgage insurance (PMI). If you put less than 20% down, PMI is required. PMI hedges the bank's bet that the loan will perform. But it is more than that- the bigger the down payment, the more likely the loan will get approved. The reason for this is simple: the less value of the home is borrowed, the more likely the borrower will repay. Therefore, a low LTV (Loan to Value) is attractive to loan underwriters. The lower the LTV, the lower the risk.
So the size of the down payment will determine the peace of mind of the seller and their confidence that they are dealing with a qualified buyer. The ultimate down payment is 100% down. From there certainty erodes. So if you are buying a home in Westchester or the surrounding counties with 3.5% down, you ought not balk if the seller is concerned. Selling a home is tough these days, and it would be tragic to have a house off the market under contract for 60 days only to have the deal fall through. Big down down payment deals seldom fall through.
I am a big fan of FHA mortgages, not because they are common in Westchester, but because I did dozens of them in Rochester. However, until recently, FHA mortgages in Westchester County were as rare as hens teeth because the FHA loan limit was so low there were few Westchester homes that were eligible. With the changes to FHA loan limits and the fall of prices, they have become common, but agents and sellers alike are still not yet used to them. I have seen sellers take a deal 5 or 10 thousand less because of the larger down payment. Again, certainty costs money. So if you are going FHA on a Westchester County home, keep that in mind when you are formulating your offer. Terms matter, and down payment is a big factor.
- J. Philip Faranda, Broker-owner, J. Philip Real Estate, LLC. 2010 Vice President, Westchester-Putnam Multiple Listing Service.
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Guarantees cost money. Certainty costs money. Big down down payment deals seldom fall through. AMEN. That may also applys when we are talking about the rock on finger. :) Yes, Certainty costs money!
I agree with you. I just had a buyer close and the seller took the deal because of the substantiial downpayment
PRICE, TERMS AND CONDITIONS.
Sometimes it's hard for buyers to understand that writing a strong offer showing good financials and assets is important in getting a contract.
They wrongly believe that, if the seller knows of their assets, they will loose negotiating strength. Wrong. A strong buyer is far more likely to get a contract even if their offer is lower.
Earnest money, down payment and loan type, terms and conditions of the loan all factor into getting that contract or a counter.
Just because a buyer has significant reserves doesn't mean that they have to pay more for a property.
Terms are very important, during the height of the market the buyer with the largest down payment almost always won. A solid offer is the sum of all of it's parts!
This is particularly important if you are negotiating for a longer term closing date. This additional money is valued by sellers and lenders.
Philip,
Large down payments have helped my buyers secure a deal more often than I can count; a good faith deposit becomes a great faith deposit.
As for FHA mortgages, they are very common in my area. Here, sellers (and their attorneys) will lean towards a conventional loan whenever possible. Stricter FHA requirements often mean more costs for the seller - septic, well, etc. If given a choice, sellers will take a slightly lower price for a conventional loan.
In my market, PMI is rare with a deal. Mostly I sell second homes and right now I only know of one vender offering PMI for second homes. A larger downpayment has always made an offer stronger. Although I do think at the height of the market a few years back with banks giving mortgages at the drive through people weren't concerned with terms so much.
With so many first time homebuyers in the market right now and the limitations on conventional financing and shifts to FHA financing, anyone with 20% down should be having tremendous advantages in this market with sellers.
Sellers are getting pretty fed up with knowing that buyers are able to buy a home for little or nothing down, and then they are being asked to pay large chunks of closing and having to accept a low price for their home, not to mention those buyers who insist on trying to make the home inspection a further negotiation. Sellers are not particularly happy that on top of this, the buyer will be getting a $8000 credit on the seller's and your/my dime. It's also not going unnoticed by sellers, that those buyers that have only a few thousand into the deal - for those of us who diligently saved to have at least have 5% down for our first homes - not sitting well.
Resentment on the part of the seller - wonder why - it's pretty hard explaining to sellers that this is the name of the game right now and if you want to sell, this is how it goes.
In areas of the country where a typical home can sell for $350,000 such as Long Island, having $70,000 for a 20% down payment is asking a lot. Taking into account the heavy closing costs here in New York plus the escrow and reserve requirements, the borrower must have about another $15,000 in the bank, Even people with good incomes may not have this kind of money which is why FHA loans are becoming more popular. It may the only way to finance a purchase.
A large downpayment always helps, but the other components are equally important such as income, debts and credit history. I've turned away more than a few customers that think because they have a 50% down payment, the bank should do the mortgage regardless of how much they make or what there credit looks like.
True, but the bottom line still boils down to how many buyers, especially FTHB's, can actually afford to put 20% down on an average house in Putnam, Westchester, Long Island and the Boroughs? Plus, Conventional loans require higher credit scores in addition to more money out of pocket.
Another issue with a little or no money down buyer is, they don't stand a chance with a short sale or foreclosure due to the time it takes to underwite those type of loans now. The average loan takes 60 days to get to the table. Most short sales and foreclosures want 30 days or less, in my experience.
Still, if you have a $300,000.00 home in Putnam for example, and go Conventional, you need a minimum of $75,000.00 liquid funds to close. Where as with and FHA loan you only need $10,500.00 if you can get a concession, $26,000.00 if not. I understand the seller's issues but they need to keep their minds open or they will exclude 75-85% of the potential buyers in the market. Let's not forget in Putnam you could finance that same home with zero down and have NO PMI. Does that ease the seller's mind, no, but it sure gives them access to a much larger potential buyer pool.
Ray- Very good points. The issue for FHA buyers is that if they have a competing offer with a higher down payment, they face a stiff challenge, if only due to perception.
Hi J. Phillip,
Great post. I particularly like your statement... "The ultimate down payment is 100% down." That is so true. A few years ago my mother passed away and my brother and I were forced to sell her home. And while we had several very viable offers, one (which was less than the others) was all cash. Guess which one we went with. : )
Tammy, PMI is a big deal here, because the prices are so high and the premiums, accordingly, are not trivial.
Doug, Someone would have to be pretty bad to have their deal denied with 50% down. But I recognize your point.
Paul- that is precisely why FHA is growing in this area (I'm in NY also)
You are 100% correct. I just bought my third home in August. It was not the highest offer for the home, BUT I walked in with a written offer that stated I was doing a conventional loan with at least 20% down and doubled the earnest money. I was under the other offer by $10k (the seller told me during walk thru) but had a solid deal against the other FHA offer...
You are right-- this is not mentioned a lot -- but a larger down payment makes a difference for sure in many cases.
FHA is very strong in some areas locally, one of my loan officers is doing 90% of his business with them. My clients are at the higher prices and will make sure enough money is put down to keep them under a jumbo. Sometimes it is the earnest money and flexibility on losing dates that seals the deal.
We have been seeing mainly FHA mortgages this past year. The 80/20 or 80/10/10 are almost gone.
But, I did close on 80/20 yesterday.
A large Downpayment says "we are serious, we want your home." to the sellers.
Condo loans are very difficult, most are requiring 30% down or more.
FHA loans are strong here. And yes larger down payments do help!
Philip, Closed a sale yesterday that wouldn't have been accepted by the seller if it weren't for the financing condition which read...subject to "what ever terms as may be offered by lender". The appraisal came in $50,000 below contract price...but the buyer wanted the place and wanted as much as he could finance. The buyer had to bring $112,000 to the closing to buy a $325,000 property. This would not have flown with a specific amount down...your welcome Mr. Seller don't forget to thank me.
It's amazing how the value of various terms changes over time. Just a few short years ago when virtually everyone could get approved for a mortgage the value of a high down payment offer wasn't much greater than a comparable low down payment offer. Now it's one of the first things we look at!
I have seen sellers reject an fha loan from a buyer in favor of a conventional loan when the overall terms/price/etc. were much stronger from the fha buyer because their listing agent gave them outdated advice -- so sad when sellers leave unncessary money on the table and buyers miss out on a home they want. In general, I totally agree with everything you said.
You;d think all this would be common sense, but in today's market, getting back to basics is important.
Philip, you are so right in your discussion about risk, or the flip side as you call it certainty, in how a loan is structured and what other costs like PMI might be involved, and how a seller is more comfortable with a buyer with more skin in the game (down payment).
Agreed!!! When competing offers are in, it is sage advice to Sellers to ask them to consider more than price. If the borrower has the funds for a larger down payment than the minimum, it is true the chances are that the borrower has credit worthiness and mortgage ability as well.
However, regardless of the down payment offered, it is wrong to proceed with any transaction unless the buyer has an up front approval from an Underwriter. United Northern's www.RealPartner.com technology enables us to provide an approval directly from an Underwriter (not a salesperson) in 24 hours or less. Any loan scenario is approved or disapproved immediately, and the Seller can know with confidence that his purchaser can close the deal, and that is what it is all about !