Financing Details of Your Offer

Financing Plans

When you submit your offer, part of the contract includes information on your financing. Unless you intend to pay cash for the home, you will need to obtain a mortgage to pay for the purchase. As covered previously, you want your obligation to purchase the home to be contingent on your ability to obtain that mortgage. Therefore, the seller has the right to be informed on your financing plans in order to evaluate the strength and seriousness of your offer.

The financing plans that you present will contain information on whether you are obtaining a fixed rate or an adjustable rate mortgage, your down payment, the amount you intend to finance, and whether you are obtaining conventional financing or a VA or FHA loan.

Down Payment

The contract offer includes not only the final selling price you wish to pay for the home, but the amount of your down payment. Seeing the size of your down payment allows the seller to determine the probability of your being able to obtain a loan. Remember that in general, the more money you put down, the easier it is to get approval for a mortgage because the underwriting guidelines are less strict.

Financed Amount and Interest Rate

Along with the down payment, your contract offer will include the amount you intend to finance. You will also indicate a maximum acceptable interest rate. Disclosing this really helps to protect you should interest rates suddenly rise and you are presented with a mortgage payment much higher than you anticipated.

Providing this information to the seller also lets him see how flexible you are when it comes to your financing. If you set a maximum acceptable interest rate at the current rate, then you would be able to cancel the contract without incurring any penalty if the interest rate rises. This may indicate to the seller that completion of the transaction is unlikely and they might back out of the contract in order to minimize the loss of valuable marketing time.

Seller’s Contribution

When you have asked the seller to provide some kind of financial incentive in order to purchase their home, it is known as a seller’s contribution. Seller’s contributions can come in the form of paying all or a portion of your closing costs, or even providing funds to temporarily buy down your interest rate. Incentives such as these can be very effective if the buyer is low on cash or stretching their qualifying ratios to the limit.

Although this always sounds like a good idea to the buyer, the seller may have a different view. You may find that the seller is less willing to negotiate on price or anything else. In truth, you are asking the seller to help you buy their house. However, if you are willing to pay a little more in the long run, the seller may provide you with a little relief in the beginning.

Seller Financing

The ultimate seller’s contribution is to ‘carry back’ a second mortgage to help you purchase their home. This is known as seller financing. When the seller has no immediate need for the proceeds from the sale of their home, this may become an option. By combining the buyers down payment with the sellers second mortgage, it may be possible to avoid paying mortgage insurance and save money. If the seller is willing to provide financing, this information will usually be listed in the MLS information data sheet which your real estate agent accesses.

If you decide to make a ‘carry back’ loan a part of your offer, make sure to include the terms you will accept on the second mortgage. Also inform your lender so that you are able to meet any minimum expectations that they might require.

Paying Cash

If you are able to pay cash for your purchase, the contract offer should provide some documentation to the seller that you have the funds available. If you need to liquidate an asset to obtain the money, offer a timetable on when you can provide proof that the asset has been converted to cash and can be used to make the purchase.

How FHA and VA Financing Affects Your Offer