| Buyer
Information
Financing Details
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.
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.
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.
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.
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.
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.
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.
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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