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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.
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.
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 to 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
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.
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.
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.
How FHA and VA
Loans Affect Your Offer
Extra Costs to
the Seller
If
you are obtaining a VA or FHA loan in order to
finance your purchase, you must include that
information in your offer. This is because
government loans place additional financial and
performance obligations on the seller.
Non-Allowable
Fees
First,
VA and FHA loans prohibit buyers from paying
certain types of fees that are often charged by
lenders, escrow companies, settlement agents, and
title companies. They are called
"non-allowable" fees. They still get
charged anyway, but as the buyer, you are
"not allowed" to pay them. The result is
that the seller ends up paying them instead of
you.
Most
of these "non-allowable" fees come from
your lender. By the time you are making an offer
you should have already been pre-qualified by a
loan officer, so you or your real estate agent can
ask how much the lender’s non-allowable fees
will be. Experienced agents should also have an
idea of what non-allowable fees will be charged by
the escrow or settlement agent and the title
insurance company.
Since
these are fees the seller would not pay on an
offer with conventional financing, this
information must be included in your offer. You
should also realize that since the seller will be
paying these additional fees, they may be a little
less negotiable on the price.
VA and FHA
Appraisals
Home
appraisal inspections on FHA and VA loans are a
little more detailed than on conventional loans
(and more expensive). The appraisers are required
to perform certain minimum inspections as well as
evaluate the market value of the property.
Although these inspections are not as detailed as
a professional home inspection and should not be
considered a substitute, sometimes repairs are
required.
These
are additional costs the seller would not be
obligated to pay for someone obtaining
conventional financing, so your offer should
include a maximum figure for these repairs.
Otherwise the seller is signing the equivalent of
a blank check, and they do not want to do that.
At
the same time, whatever figure you put in will
most likely affect the seller’s willingness to
negotiate on price. If you put $500 as an
estimate, the seller may be $500 less negotiable
on their price. If no repairs are required, you
may have been able to get the house for $500 less
than what you and the seller agreed on as the
price. The solution is to add a clause to your
offer that goes something like this. "If
required repairs cost less than the maximum amount
allowed, the excess will be credited toward
buyer’s closing costs."
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