We’re often asked why the seller cares how much of a down payment a buyer uses. “Don’t they get the same amount of money either way?” Actually, sellers could care less about how much down payment a buyer uses.
What sellers DO care about is what the buyer’s mortgage contingency clause looks like in an offer. I like to think of contingency clauses as “But-Not-If” clauses, because that’s effectively what they are.
In other words, a common offer with inspection and mortgage contingencies basically reads like this: I will buy your house for $XX, But-Not-If I don’t like the inspection results, And-Not-If I can’t get a mortgage for XX% of the home’s value.
Hopefully, you can see where I’m going with this!
There are different variations of But-Not-If clauses which vary in how much they protect the buyer’s ability to back out of the transaction.
In the case of a mortgage But-Not-If, there’s a big difference between one that says a buyer needs to get approved for 97 percent of a home’s value and one that says only 70 percent of the home’s value is needed. Buyers using a 97 percent mortgage are assumed to be doing so because they don’t have the extra cash handy to use as a down payment.
If a buyer is using every last penny to just barely put three percent down payment and pay for closing costs, almost any unexpected financial hiccup could make them become unqualified for their mortgage (or any mortgage). The But-Not-If clause in their offer would allow them to back out of the home purchase without penalty if that happened, which is why sellers are wary of their offer in the first place.
If a buyer writes a But-Not-If clause that only requires a 30 percent down payment on the other hand, that buyer is also demonstrating that they have a more substantial pile of cash at their disposal to deal with any unexpected financial hiccups. That buyer is more likely to be able to weather a perfect storm of unexpected hospital bills and a dip in their income due to time out of work, interest rates rising sharply, etc. and still be able to purchase the home.
The second buyer’s But-Not-If clause still says that the buyer can back out if they can’t get approved for a 70 percent loan, but the seller knows that the buyer is probably also able to use a loan with a lower down payment as a backup plan if need be.
Again, the buyer advertising that they need a 97 percent loan is making it seem like they don’t have a backup plan.
Many buyers don’t realize that they’re not required to use the down payment they specified in their But-Not-If clause. If a buyer wants to put five percent down but is willing to put 10 percent down if they have to, I suggest they consider writing their But-Not-If clause to reflect the 10 percent down payment rather than five percent. They can still apply for a 95 percent loan that way, but won’t be able to back out of the purchase if they can’t get it in the end.
Their But-Not-If clause won’t kick in unless they can’t get the 90 percent loan, but they just might have beat out another buyer whose But-Not-If clause listed a 95 percent loan!
Do you have questions about home buying or selling? Dave Lenhardt can be reached at:
Kadilak Realty Group
Keller Williams Boston Northwest
Call or text 781-557-8673
Attend one of our FREE EDUCATIONAL WORKSHOPS
See our reviews on ZILLOW!