Home Buying in Sacramento>Question Details

M.christo, Other/Just Looking in Sacramento, CA

Assuming I can get the financing, why would the seller care about down payment?

Asked by M.christo, Sacramento, CA Tue Jun 3, 2008

I understand that some funding sources are more desirable to sellers than others (e.g. VA and FHA have fairly strict standards about what kind of shape the home has to be in, or may require sellers to pay certain closing costs), but beyond that, why would the seller care if I am making a small down versus a large down? We could sell a bunch of stock to put 20% down (it's just in a regular brokerage account), but we've been approved for a conventional loan (non-gov't program) that only requires 3% down, which would be move convenient for us for a variety of reasons. On the other hand, I keep reading that sellers prefer a large down payment. If they get their money in the end, why would they care?

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I see there was an important point missed in this discussion. There is a huge difference between an all-cash buyer and a buyer with financing. That difference is the appraisal. Financed transactions rely on an appraisal to protect the bank's security. The appraisal, contrary to popular belief, is not performed to assure the buyer that he or she is paying the right price. It's to protect the bank's investment in the home. And an appraisal is simply a matter of opinion, it's not a gold standard.

However, the problem that arises when an appraisal comes in lower than the sales price is given the present terms of a transaction, say 20% down for example, the bank now has a higher loan-to-value ratio for is 80% loan. What was originally an 80% loan could become an 85% or higher LTV. So, the bank won't make the loan unless the buyer puts down a larger amount.

Buyers are reluctant, most of the time, to put down more - whether it's 3%, 5%, or 15% more. So, buyers do what appears to be a logical solution and they turn to the seller to demand that the seller lower the sales price. That's why sellers like all-cash buyers.

On top of which, all-cash buyers can't cancel because of underwriting conditions or a bazillion other types of financing scenarios. They typically will reduce the contingency period, particularly in multiple offer situations and they can close escrow faster.

Borrowers who get 100% financing or choose to put very little down appear weaker when compared to an all-cash buyer. However, if you hire a strong buyer's agent who knows how to make your situation appear advantageous to the seller, half the battle is won right then and there.

P.S. And that's why with most REOs, all-cash wins hands down.
3 votes Thank Flag Link Wed Jun 4, 2008
You are correct in your thinking to a point. When all is said and done and the seller has their money at the close of a transaction why should they care how they got it? (legally speaking). I have to laugh sometimes when I receive offers that are broadcast by the other agent as an "all cash" offer. Well that does remove many contingencies we work with during a purchase transaction but it will still be "cash" when the purchase is completed through a lender or "cash".

The amount of the down payment simply shows an amount of strength a buyer has in procuring a successful loan hence, a successful closing. It may seem that a larger down payment would be coined a stronger purchase offer but in reality it comes down to the lender's list of requirements they will need from the buyer in excess of the down payment portion of the loan.

You could have a 3% down payment buyer that is much more qualified to close the purchase then a buyer putting 20% down due to credit ratings, employment verifications, debt ratios, etc. The amount of money put down on a home may or may not be of value to a seller. Closing the purchase is of greater value to a seller, period. Best to you!

Diane Wheatley diane@moveupproperties.com
4 votes Thank Flag Link Wed Jun 4, 2008
Sellers are very nervous in this market. In reality it does not matter if you are buying with 50% down or zero down, as long as you close the sale. However there is a higher failure rate to close the transactions where the buyer is putting less than 10% down. My suggesstion is to offer proof to the seller that if you cannot close at the lower down payment that you would be willing to sell some stock to make the higher downpayment and still close the sale. This would pacify most nervous sellers.
Web Reference: http://jeffstoffel.com
3 votes Thank Flag Link Wed Jun 4, 2008
First, your Realtor should go to bat for you to emphasize that your down payment is a choice not a stretch. From a seller's perspective, this would be an issue if they are concerned about the home's appraised value. If there are multiple offers, the seller will choose the strongest offer. Often, the terms (ie. closing date, not waiting for the buyer's home to sell, etc) of the offer are more important than the price or down payment. The seller just wants to be sure the deal will close, communication is they key.
3 votes Thank Flag Link Wed Jun 4, 2008
I completely agree with you M.christo. The key phrase in your question is "assuming I can get the financing" and yes if that is 100% true then there is not and should not be any difference between a big and small down payment. However sellers sometimes don't really think with logic and will go for the deal that APPEARS to be better even if the numbers are really exactly the same because it gives them a warm fuzzy feeling.
3 votes Thank Flag Link Wed Jun 4, 2008
M. Christo,

"If they get their money in the end, why would they care?" -- M. Christo

One of the components of underwriting is to look at a person's collateral (in other words, their down payment amount). Why is this important? Because collateral signifies commitment to the property (the higher the commitment the better to both the lender and the seller). It's important to the seller because it says "hey, I'm serious! I REALLY want to buy your home." (Kinda like when you give a girl a diamond ring and ask her to marry you...the diamond ring signifies a degree of seriousness and commitment to wanting to take your relationship to the next level).

A high degree of commitment might be particularly important to any seller because they're highly motivated to sell their home. A higher degree of commitment warrants the assurance that their home is in fact going to get sold on "this" offer...psychologically it says I won't have to deal with another escrow and my deal will close on "this" escrow.

If someone decides to buy a $500,000 home and they put $150,000 (30%) as a down payment, that's how much they have to lose on the property. So naturally, the higher the down payment, the larger their commitment.

So ultimately, that's why they care. Homes are still being bought with as little as 3% down but a larger down payment signifies a greater commitment to the property which puts both lenders and sellers at ease.

Best,
Ricardo Bueno
3 votes Thank Flag Link Wed Jun 4, 2008
Pacita gave you a great answer. Lending requirements change on a daily basis...occasionally an hourly basis. Just because your program exists today, nothing is final until the loan funds at the conclusion of the transaction.

A buyer who can make a larger downpayment will likely be more capable of adapting to changing loan program requirements.

One thing you may request of your loan officer in addition to your pre-qualification letter, is an automated underwriting approval (sometimes referred to as DU Approval), or additional language stating what your FICO scores are (if they are impressive) and stating that the loan officer has already verified your income and assets. This extra step will speak volumes to a seller.
Web Reference: http://www.erinattardi.com
3 votes Thank Flag Link Wed Jun 4, 2008
Erin Stumpf, Real Estate Pro in Sacramento, CA
MVP'08
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Good Evening M Christo,

This is a great question, and one I will try my best to answer.
Ultimately a seller cares about their bottom line. Which offer will net them the most for their home. As you put it, "they get their money in the end."
Keep this in mind though: With the mortgage meltdown, sellers know that the actual likelihood of their home falling out of escrow with a buyer that has a larger down payment is much lower. Also, if by chance the appraisal came in higher than the sale price, the buyer would be able to cover the difference with the large amount of cash they have available. Next, keep in mind that the listing agent also has an impact on this decision. Many agents believe that a larger down payment is a more "serious" or "stronger" buyer when in fact, from experience, if a buyer has been qualified by an experienced loan officer, there should be no problems with putting little down payment.
I also believe perception plays a big role in this. During the boom when anyone could get a home loan, agents didn't worry so much. Now, agents are much more skeptical of lenders and thus more likely to scrutinize the loan and its impact on the home sale.
I hope some of those reasons were able to help.
Good luck on your home purchase.

Best Regards,
Alex Amaro

http://www.alexamaro.com
3 votes Thank Flag Link Tue Jun 3, 2008
There are several reasons why sellers perceive as a good offer one that has a large down payment. But perhaps the most important is that a larger down payment signals the Buyer's financial wherewithal to complete the sale.

The bigger the down payment, the smaller risk the lender assumes. Which means there are fewer hurdles to overcome in getting a loan. Which means the easier it would be for the lender to approve the loan. Which means the greater the probability of closing the sale.

We hear of too many horror stories when escrow is near closing and the lender's requirements change, the buyers lose their loan, they are unable to complete the sale, and the sellers lose valuable marketing time when they took the property off the market while it was in escrow.

As you can see, the higher the initial deposit, the higher the down payment, the stronger the offer.

Good luck!
3 votes Thank Flag Link Tue Jun 3, 2008
In appearance it makes the deal look more solid. In actuality it doesn't matter. A qualified buyer is a qualified buyer.
Web Reference: http://GetPrequalified.com
2 votes Thank Flag Link Tue Jun 10, 2008
I like Keri Millers answer. If the seller is aware that you have the 20% in financial asset reserves and a full loan approval, they will most likely consider you as highly as they would a buyer who was putting their 20% down. There may be exceptions, because as Mr. Spock observed: "Humans are not logical creatures"
2 votes Thank Flag Link Wed Jun 4, 2008
Jim Walker, Real Estate Pro in Carmichael, CA
MVP'08
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