Bruce & Pam Wachter, REALTORS
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How Financing Affects Your Offer on a Home
In most instances, many real estate buyers cant buy a home for all cash, so they must obtain a mortgage to finance their purchase. As such, most residential purchase contracts have a financing contingency, i.e., that the buyer successfully obtains a mortgage OR he can back out of the deal. As such, the seller has the right to be informed of your financing plans in order to evaluate them as he considers your offer. That is one of the biggest reasons that financing details are included in the offer to purchase.
As part of the offer to purchase, disclosing the amount of your down payment is asked. This, again, permits the seller to evaluate your chances of obtaining a mortgage. As most know, the larger your proposed down payment, the more easily it is to get approved for a mortgage; and underwriting guidelines are less strict.
Giving the seller your financing information in the purchase contract is another form of protection for you. For instance, if interest rates rise suddenly or become volatile, you could be looking at a much larger monthly payment than you anticipated. By putting a ceiling on the interest rate that you will consider paying, you permit yourself another safety net in that if the rate you are able to obtain is higher than that ceiling figure, you may walk away from the contract.
You should evidence at least SOME flexibility to the seller. If interest rates are currently seven percent, you should think seriously about stating that the highest rate would be seven and one-half percent. This indicates to the seller that you are not inflexible, and that if the interest rate you can obtain is slightly higher than current rates, that you will not cancel the contract. The seller is, after all, taking his home off the market while you attempt to obtain your loan, and he may have made concrete plans for moving based on successfully closing the transaction with you.
Asking for Closing Costs and Finance Incentives
There may be times when, as part of your offer, you decide to request that the seller pay all or a portion of your closing costs, or provide some other financial incentive to you. Such incentives can be especially helpful when a buyer is tight on money or pushing their finances to the limit.
Whenever you ask for incentives such as these, sometimes the seller is 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 bottom line is that, for a little sellers help in the beginning, you are willing to pay a little more longterm.
Another scenario is to have the seller "carry back" a second mortgage to help your purchase of the home. In cases when the seller does not need all the proceeds from the sale 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 a request for carry-back is part of your offer, you should include the terms you wish to pay on this second mortgage. Keep in mind that your first position 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.
If you are one of those lucky individuals who is able to make a cash offer to buy a home, it makes good sense to provide some documentation with your offer that shows you have the funds available. A bank statement would be fine, or a letter from your financial institution showing proof of assets. If you have to liquidate another 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 and the proposed term of the mortgage. It should also state whether you are obtaining conventional financing or obtaining a VA or FHA loan, as these can affect how long it will take you to obtain fundingimportant consideration for a seller who is holding his home off-market as you work out your funding.
The Loan Status Report (LSR)
In addition to the provision for financing terms contained in the purchase contract, you will also be asked to fill out a Loan Status Report (LSR) where the information is repeated, but also gives the name of the lender or broker that youve spoken with, and when that was, and a general idea of the status of your proposed loan. OR, if youve not spoken with a lender or broker, an indication that you will do that immediately. You will have a set number of days to provide the seller with more concrete information to assure him of your sincerity about obtaining your home loan in an expedient manner.