Home Buying in New York>Question Details

Jaba, Other/Just Looking in New York, NY

Why does the seller care whether the buyer puts down a 20% vs 3.5% downpayment?

Asked by Jaba, New York, NY Fri Jul 30, 2010

Why does a seller care whether the buyer puts down 20% or 3.5%? Isn't this a buyer-lender issue? The seller could care less because they're getting their money either way, correct?

I have a seller that required to know how much I was putting down in the offer sheet. This percentage down was written into the contract, however I'd prefer to have all my options open. What does the seller care if I put 3.5, 10, or 20% down? How does it impact them?

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Jaba,
How much you put down may be irrelevant to the seller at the closing providing the balance due is funded. It's not irrelevant when a buyer requires a financing contingency. A financing contingency protects a buyer's deposit if they can't secure financing. A financing contingency is not in the seller's best interest it's in your best interest. They are taking a risk by taking the property off the market. A contract with a financing contingency usually has language requiring the buyer to apply in good faith for a mortgage that conforms to what most commercial lenders require. You're entitled to shop around for any kind of loan. However, by the loan commitment date if you can't secure a commitment for more than 80% financing but you're approved for 80% financing the seller doesn't want you to walk and give back your down payment. Your lawyer should be able to use language in the contract that gives you options but also gives the seller assurance.
2 votes Thank Flag Link Sun Aug 1, 2010
Mitchell Hall, Real Estate Pro in New York, NY
MVP'08
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Jaba,
It is all perception. You have answered the responses below that it is neither a co-op or condo. Therefore I won't go down the road of co-op requirements and co-ops vs. condos. When you are at the offer stage, a seller or their agent looks at the whole picture, not just the number you are offering. The more a buyer puts down, the more qualified they are deemed to be in the eyes of the seller. But since you are talking about the contract, it seems you have an accepted offer. Contracts do include the percentage down and the percentage being financed. You don't have the option of it not being in there. You can always finance less, though not more than what is written into your contract. When you are entering into a contract, your are making a deal and the deal does include how you are financing and what percentage. I assume you have a mortgage contingency clause in the contract and that is why the information about the type of mortgage and the percent you are borrowing is relevant.
1 vote Thank Flag Link Sat Jul 31, 2010
Jaba,
If you're putting only 3.5% down, it sounds like you're going FHA and financing your closing costs. If that is the case, then the reason the seller is concerned is that the home has to appraise for the total amount financed - with the closing costs added. In today's market, that may be difficult. For instance, let's say you're buying a home for $300,000. Closing costs are typically around 6% of the purchase price. If you're financing 100% of the value of the plus another 2.5% for the closing costs, the house would have to appraise for $307,500 rather than $300,000. FHA requirements for a loan are a bit more restrictive than most of the other loan products out there. So, at the end of the day, if the seller is buying another home with the proceeds from your sale, it is very important to them that the deal gets done. You would be a much stronger buyer if you put 20% down rather than doing a seller's concession. At the end of the day, if you're working with a good buyer's agent and otherwise you are a strong buyer, you should be able to work it out. Good luck.

Ralph Windschuh
Associate Broker
Certified Buyer Representative
Senior Real Estate Specialist
Century 21 Princeton Properties
631-467-0009
rwindschuh@c21princetonproperties.com
Top 2% of Century 21 Agents Nationwide!
1 vote Thank Flag Link Sat Jul 31, 2010
Jaba,
Don't forget you will need at least a years worth of payments in the bank, depending on the area in NYC, some require 2 years. Also, a bank will more than likely not lend to anyone if you have nothing in the bank after your down payment. The more you can put more down, you won't have to pay PMI (Principle Mortgage Insurance). That adds up.
1 vote Thank Flag Link Fri Jul 30, 2010
Hi Jaba,
If you are talking about purchasing in a co-op in NY, then the minimum required is at least 20% as a down payment but it may be higher depending on the building. Each co-op building sets their own rules on how much of a down payment is required to purchase in their building. The seller will want to know what you are putting down so that when considering your offer they know that you are qualified to purchase in that particular building & will have no issues getting board approval.

In a condo, building's require 10% down. However, these days with the credit crunch as it is, I have seen lenders require more than 10% to approve financing. So a seller may want to see more than 10% as a down payment, so that financing is not an issue, even though the building will allow it. I've seen FHA loans used here more recently in new construction where in order to make deals happen, developers have gotten their buildings approved for FHA.

In the past, it's been much more difficult to gain board approval in a co-op than to get approved for a loan. And that's the reason we haven't seen the large foreclosure rate in NYC that we've seen in the rest of the country. Co-ops are 75% of the market here so we've been protected for the most part from that here. The banks have tightened their lending requirements & that's a good thing for all. Hope this was helpful...

Best,
Linda Taitelbaum
Citi Habitats
212 844-4342
ltaitelbaum@citi-habitats.com
http://www.lindataitelbaum.com
1 vote Thank Flag Link Fri Jul 30, 2010
The acceptance of an offer to purchase is based on more than a purchase price; it is based on the various parts of the transaction....down payment, closing date, PRE-APPROVAL...

If you had a FUL PRE-APPROVAL, sometimes known as a pre-commitment....contingent only upon an appraisal and a contract, they might be more inclined to not be too concerned.

In our current climate, too many deals fall. The bigger the down payment, the more chance the bank will take on the loan commitment...they have less to lose.

Unless you have a full pre-approval/pre-commitment, you should not even be looking...get the priorities in order and make yourself an A-1 Buyer!
Web Reference: http://GailGladstone.com
1 vote Thank Flag Link Fri Jul 30, 2010
Also, it depends what the BUILDING requires. Buildings in New York City EXPECT a buyer to put down 10%, 20%, 25% and some don't allow you to have a mortgage. Hence, we don't have the issues other States do.
1 vote Thank Flag Link Fri Jul 30, 2010
Let's put you in the sellers situation. If a buyer came along to buy your house and you were expected to take it off the market for a few months and no one else could buy while you were in contract, wouldn't you want a solid deal.

You show a seller you are serious when you put down a reasonable or exceptional down payment amount. Many buyers have walked away from their contract because they put down a small down payment. When a seller knows your putting down a substantial amount they know that you are not going to break that contract and walk away from your down payment for them to keep. Makes sense now!

I hope this will help you understand because if you buy today and sell down the line you need to understand this concept before you go into contract with a buyer with only a small down payment on your house and can walk away with very little to lose.
Web Reference: http://www.KandHhomes.com
0 votes Thank Flag Link Sun Aug 8, 2010
Jaba,

In response to Hannah's post. I'd be very cautious of any agent recommending that you make a larger down payment so that "...you guarantee that they all get paid!"

When I'm representing a buyer I include a clause to the opposite effect, stating that if the property does not appraise for the agreed purchase price you (the buyer) can walk away. Why would you want to "buy equity"? That makes no sense, especially in this market!

Good Luck,
0 votes Thank Flag Link Thu Aug 5, 2010
Hi Jaba,

If the property does not appraise well then the seller and certainly both realtors care what you put down. For example let's say that you want to purchase a property at $100k and you put down only 3.5% and the property appraises at $95K then the lender will not lend on that property.
Now say you put down 20% on the same house. It does not matter what the appraisal came in for, because you are putting so much money down that you actually "bought" equity.
Both realtors and the seller will love you more if you put down the 20% because you guarantee that they all get paid!

Good luck!
0 votes Thank Flag Link Thu Aug 5, 2010
Jaba, sorry I didn't read your follow up until today. As far as the financing contingency goes, if you get approved for a 3.5% down mortgage, and there are no issues, then you are fine and don't have to worry about what the mortgage contingency says. As long as FHA isn't asking the seller to do something that a conventional loan would not. What you cannot do is say that you were declined for a mortgage with 3.5% down. In that case, you would have to apply for the 20% down loan, and if you are declined again, you could back out and get your deposit back. The catch might be that the seller has to sign the FHA amendatory clause and real estate certification. If you are going to a lender who will not give you a commitment without getting that signed, you would have a problem. My company would give you an FHA commitment without that being signed. The other caveat is that assuming you are buying a condo, it has to be FHA approved.
0 votes Thank Flag Link Wed Aug 4, 2010
Hi Jaba

Sure they care, a twenty percent down is a show of capability and three and half percent you are questionable

Good luck.
Perry
0 votes Thank Flag Link Wed Aug 4, 2010
Sounds like you have a live one! I've had that before. Some of them have been burned in the past and may feel that if the buyer has 20% to put down they won't back out on the agreement. Good Luck!
0 votes Thank Flag Link Wed Aug 4, 2010
Jaba, I would recommend that you have your lender invite the seller's Realtor call so the lender can give strong assurances to the Realtor. I do this for my clients whenever the other side has doubts about the strength of the buyer in order to allay the fears of the selller.

As Jenet stated, it is all about perception and while a buyer putting down 20% is perceived as a stronger buyer than one putting down 3.5%, a few words of assurance from your lender can very likely convince the seller that you are the right buyer for them.

Good luck!
0 votes Thank Flag Link Sat Jul 31, 2010
Correct Jenet, you have it right, thank you. We have an accepted offer. The contract is being written up w/ the 20% down clause due to that information being the offer. Even though the contract has a mortgage contingency, it's based on the 20% down and financing of no more. However, in looking over my options it appears that less down may be the better way to go due to renovation costs and some other issues. (Note: We have plenty in the bank in either scenario). Unfortunately, they've writing the 20% into the contract even though, how much I put down, is irrelevant to the seller. It's just piece of mind for them.

Perhaps I can provide more assurances to them that we're well qualified and financing will happen, but that we need to remove the 20% contract contingency to move forward.
0 votes Thank Flag Link Sat Jul 31, 2010
Once the deal is done and contracts signed the seller has no more input into what your down payment is.
0 votes Thank Flag Link Fri Jul 30, 2010
This is for neither a condo, nor a co-op.
0 votes Thank Flag Link Fri Jul 30, 2010
Jaba, if you are buying a co-op, 3.5% isn't an option regardless because FHA does not do co-ops (although they keep promising). Where in NY you are will also make a difference. There are areas where they are used to FHA financing, they know that the building is FHA approved, and as long as you can get approved, and the unit appraises, there is not problem. Another thing that happens with an FHA deal is that all agents involved and the seller have to sign an amendatory clause which allows the purchaser to back out if the unit doesn't appraise, and not suffer any consequences. Some sellers do not want to take that chance. if you put down 20%, and the unit doesn't appraise, you may not be able to get the loan anyway because you might not have any extra money to put down, and you may not qualify for PMI even though you qualify for the loan.
There are 2 other issues. One is just lack of information about what FHA involved, so that they just don't feel comfortable with it because they are afraid that they will have to fix problems, etc.
Although the difference between 3.5%, 10% or 20% down still required the unit to appraise in order to get the required financing, if you have a buyer who is putting down a more substantial down payment, the seller doens't have to worry as much about appraised value.
0 votes Thank Flag Link Fri Jul 30, 2010
I would answer by saying that I am definitely all of these: a serious buyer with strong credit and cash in the bank. And I've proven that to the Seller by providing full pre-approval w/ 20% down for both a conventional and FHA loan on the offer sheet. Now that the formality of the offer is accepted, I want to be able to work with a lender based on my best interests which may not be by putting 20% down.
0 votes Thank Flag Link Fri Jul 30, 2010
The seller cares because almost all buildings have minimum buy-in requirements. Even though a bank might be willing to finance more than 80%, expect a 20%-25% minimum down payment as pretty much standard.

You're the one making the offer and it should have been made on your own terms, not the seller's. However if you're buying into a co-op and most condos, your application will go nowhere if its going in for board approval without that down payment.

On the other hand, if you're in a short sale situation which this might be then the terms are dictated by the lender and that's something that varies across lenders.

If you're looking at rehabilitating 20% is the minimum to get a loan but that could include construction costs.

Remember, a serious buyer with strong credit and cash in the bank owns this market.
0 votes Thank Flag Link Fri Jul 30, 2010
Jaba.... in your follow up "answer" you probably hit the nail on the head with "The one with higher down payment provides some added confidence that lending will come through."

The price is only one consideration that a seller may use to evaluate an offer. A higher down payment may make some sellers feel better about the buyer's ability to close, when in reality the buyer with less of a down payment may in fact be most likely to close, depending on the situation. A higher down payment does not guarantee the loan will close!
0 votes Thank Flag Link Fri Jul 30, 2010
To sum it up the seller cares because there is a perception that if you are making a larger downpayment you are more likely to have the finacial wherewithall to weather contingency costs that could come up during the purchase process. Things related to the purchase and personal expenses like an expensive car repair or medical expense.

Another consideration is that some uneducated buyers may make an offer on a property not realizing the lending requirements for their type of purchase. For example, I was recently working with a seller who received an offer from a newbie investor on their townhouse. The buyer planned to put 5% down, not knowing the minimum down payment requirement for this investment would be 20%. Since we requested the information we where able to avoid entering into escrow only to find out the buyer could not perform on the contract, eating up valuable market time.

Anther case-in-point I recently received an offer on one of my listings where the buyers-agent thought the home fell in an area where zero down financing was available through our state. The contract read that they where putting zero down. Since I knew the property was outside of the area that qualified for the zero down financing we again were able to avoid entering into escrow.

Both of the examples above happened within about 2 weeks of each other. So although it is rare, since most buyer agents and buyers do their homework, it still is important to know.

Hope this helps!
0 votes Thank Flag Link Fri Jul 30, 2010
Still makes no sense to me. As the seller you're going to get the $, no matter if the buyer puts down 3.5 or 10 or 20. What do they care?

During the offer process, asking how much the buyer intends to put down can be used to differentiate between two potential buyers? The one with higher down payment provides some added confidence that lending will come through. And then they want that in the contract to hold the person to that faith. Could that be the reason why? Although, I've already proved that I can pay 20%, but I may choose not to in the end due to lending options.
0 votes Thank Flag Link Fri Jul 30, 2010
Although it shouldn't matter, many sellers will ask, and it's up to you to decide whether or not you'll provide that info. If a seller were to ask me that question, then I'd reply with another question inquiring if s/he intends to provide seller financing. If not, then I'd ask why s/he needs to know that. Nevertheless, some sellers ask that to determine whether or not you're using a FHA loan.
0 votes Thank Flag Link Fri Jul 30, 2010
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