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.
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Interest
Rates
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.
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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.
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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.
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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.
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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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